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What a couple of kids at the CNE can teach the government about budgeting

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In September everything is back in swing. Kids are back in school. Governments are back in session. Money will be spent on juice boxes and money will be spent on pipelines. Before the juice boxes get packed for school though, I had the pleasure of being at the CNE in Toronto with my son and my nephew.

As we walked among the crowded midway, I was asked a few times whether they could try this game or that. I said “not now” a few times until I eventually told them “I will give you $20 to share. It is your games budget. Once it is done, no more games.”

I immediately noticed an incredible transformation in their behaviour and approach to the games. No longer would they do the rope ladder game at $10 a pop that 30 minutes earlier they had been so interested in. The $5 whack a mole was no longer worth it, given the prizes. They suddenly became the ultimate in value shoppers. Each game was studied in terms of price, prizes, and perceived difficulty. Questions were asked of the people running the games, and even lengthy observations took place of the crowds playing to determine who was winning and what paddle, gun or ball they used to get there.

As I watched this transformation, it became perfectly clear. Their earlier requests required nothing of themselves. It wasn’t their money. It was from some mysterious and seemingly deep well of funds that you could ask for, and even if the answer was no, you knew you could try again at some point. Now it was different. This was their money. It was limited. Decisions and tradeoffs were required. They knew that they had to treat the funds with respect and care.

The end result of their game adventure was that the $20 had been spent, but they stretched it for a good hour, while managing to win a taco pillow and a hat that I think was a turd emoji (they are 11 and 12 year old boys after all). I recognize that with some kids, this transformation would not have happened, but in this case I found it fascinating. What could be learned from this? How can the CNE experiment be applied to the greater good?

Now I turn my attention to the federal government of Canada. They too are essentially back at school, actively running our country to the best of their ability. The question is whether they run this massive enterprise by asking their parents for money from a seemingly bottomless pit or do they act as if they have $20 and they have to make it work. I think you know the answer to that one.

Here are the basics for the federal government:

2018 Projected Total expenditures: $338.5 billion

2018 Projected Total revenue: $323.4 billion

2018 Projected Deficit: $18.1 billion (including a $3 billion adjustment for risk).

These figures are for just the one year.

The federal government’s market debt — the debt on which Ottawa pays interest — topped $1 trillion in March of this year.

In a year where the economy is in relatively good shape, how can we project an $18.1 billion deficit? To learn from the CNE example, how about this ‘You have $323.4 billion to spend, and that is it. Once it is done, there is no more money.” How hard is that? This isn’t 2009. There is no economic crisis. This is a year where there is absolutely no excuse for running an annual budget deficit.

How about the debt? How would I talk to my kids about that one? I would tell them that you are very fortunate to be able to go to the CNE and have fun. You have $20 for games, but I really think you should set aside $2 from that and use it to give to someone that isn’t as fortunate, or to save it for something later this year that you might want to spend it on.

I know this isn’t a perfect analogy, but my son and nephew don’t owe anyone $1 trillion. However, I know someone who does. Guess what that group plans to do in 2018 instead. They plan to add another $18 billion to the amount they owe. If my son and nephew did owe someone $1,000, guess what they wouldn’t have been doing at all. They wouldn’t be using $20 for games at an amusement park. The $20 would have gone to paying down that debt.

I know that it isn’t right to compare federal government spending to games at an amusement park, but maybe it isn’t so far off. In the small category of questionable government spending, we have the $155,000 that was spent last year to have a red couch travel the country by RV to celebrate Canada150. In the large category, we have the $4.1 billion that has been provided by the Federal Government to Bombardier in the form of grants, loans and other investments since 1966 — a significant amount of which took place in the past three years.

I understand that setting budget priorities is a very difficult job, and even the examples above can be argued as to whether they were appropriate or not. The key point is that if federal government employees had some feeling that this was their own money being spent, it is hard to imagine these and other expenditures would have happened.

So where does this leave us?

Whether it is with your kids or our elected officials and their staff, there needs to be a greater connection to and ownership over spending. Perhaps with the federal government, there could be a reduction in government pension contributions equal to 3 per cent of annual budget deficits. As an example, for 2018, if we end up with an $18 billion deficit, there would be a $540 million deduction in government pension contributions. That would at least be a start when it comes to helping all federal government employees feel like it is their money being spent.

As it stands today, it often feels as though our government’s spending discipline is like a kid asking for money to play the ring toss game at the fair.

Reproduced from the National Post newspaper article 10th September 2018.

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

FINANCIAL FACELIFT: Great savers, not so great at investing

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Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their 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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published August 31, 2018

Logan and Tina are clear about their goal: to retire in four years with more money in their pockets than they are spending now. He is 63, she is 54. They have two grown children, a house in Southwestern Ontario and no debt.

Both have good jobs, he in education and she in an office. Together, they bring in about $187,000 a year. Logan has a defined benefit pension plan, indexed to inflation, and Tina a defined contribution pension plan, where the benefit depends on the performance of financial markets.

They’re prodigious savers, contributing regularly to their various investment accounts as well as their pension plans. They also have a substantial amount of money sitting in the bank. They keep the cash partly because “we are uncertain about a potential market crash, so are holding this until the market is on firmer footings,” Logan writes in an e-mail.

When they retire, they plan to sell their city house and move north to a place on Georgian Bay. They plan to take one big trip every five years. Are they on track?

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

What the expert says

Altogether, Tina and Logan have a total of $1.4-million in investment assets and savings, Mr. Ardrey says. They add to these investments regularly, making the maximum $5,500 TFSA contribution each year. Logan maximizes his RRSP – he has $6,185 of contribution room this year – and also contributes about $11,600 to his defined benefit pension plan. Tina makes $9,700 a year in defined contribution pension plan contributions and receives an employer match of $6,480. She also saves $10,320 a year in her employee share purchase plan.

“Even after all of these savings, they still have substantial surplus cash flow,” Mr. Ardrey says. This money goes to a combination of their investment and the bank savings accounts.

When Logan retires from work, he will get a pension of $34,100 a year, indexed to inflation, with a 75-per-cent survivor’s benefit. He can split his pension income with Tina. Tina will begin collecting Canada Pension Plan benefits at the age of 65 and Logan at the age of 67 in Mr. Ardrey’s plan.

“They are currently spending about $37,000 per year and expect to increase that to $70,000 in retirement,” Mr. Ardrey says. “They want increased financial flexibility and to ensure they never have to worry about money.”

When they move up north, they plan to buy a house in roughly the same price range. Mr. Ardrey includes moving costs of $38,200 in calculating their initial retirement income. As well, he has added $15,000, adjusted for inflation, to their retirement spending target in 2022, the year they retire, 2027 and 2032.

While Logan and Tina are great savers, they are not so good at investing. “Currently, Tina’s and Logan’s asset mix is almost 30 per cent in cash and cash equivalents!” Mr. Ardrey points out. “This is creating a substantial drag on portfolio returns.” The rate of return on their overall holdings is 3.87 per cent. In addition to the cash, they have a broad mix of mutual funds, some with relatively high fees, so their investment cost is 0.8 per cent.

Even with the modest return, the couple could meet their retirement spending goals because they have saved enough, Mr. Ardrey says. “They will have an estate of $3.3-million, including their real estate and personal effects, at Tina’s age 90.”

Still, Logan and Tina could benefit from simplifying their investments by moving from an investment dealer to an investment counsellor, a firm that has a legal duty to act in the best interests of its clients, Mr. Ardrey says. Investment counsellors charge an annual fee that is a percentage of the client’s assets.

For the fixed-income side of the portfolio, he suggests supplementing traditional fixed-income securities with some alternative income investments such as private debt, international real estate and accounts receivable factoring. This would improve fixed-income returns and lower overall risk because alternative investments are less correlated to the broader financial markets.

By changing their asset mix to 50-per-cent equities, 30-per-cent fixed income and 20-per-cent alternative income, and using the services of an investment counsellor, they should be able to achieve a return around 6.5 per cent with investment costs of 1.5 per cent, for a net return of 5 per cent a year, Mr. Ardrey says. “With an improved strategy, they could retire right now if they wanted to do so.”

Client situation

The people: Logan, 63, Tina, 54, and their two grown children

The problem: Are they on track for a prosperous retirement in four years?

The plan: Not much to do, but if they improve their investment returns, they could quit working tomorrow.

The payoff: The comfort of knowing they have more than enough.

Monthly net income: $12,615

Assets: Cash in bank $134,000; stocks $106,300; mutual funds $214,430; his locked-in retirement account $34,470; his TFSA $73,900; her TFSA $83,540; his RRSP $114,895; her RRSP $278,075; market value of her DC pension plan $364,520; estimated present value of his DB pension plan $784,300; residence $350,000; undeveloped land $30,000. Total: $2.57-million

Monthly outlays: Property tax $185; home insurance $60; utilities $185; maintenance, garden $125; transportation $410; groceries $650; clothing $125; gifts, charity $225; vacation, travel $35; other discretionary $40; dining, drinks, entertainment $250; personal care $50; pets $50; hobbies $10; subscriptions $50; other personal $210; drugstore $90; health, life, disability insurance $250; phone, internet $75; RRSPs $685; TFSAs $915; pension plan contributions $1,775. Total: $6,450. Surplus of $6,165 goes to savings and Tina’s employee share purchase plan.

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

FINANCIAL FACELIFT: Home upgrade could saddle couple with too much debt to easily meet retirement dreams

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Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their 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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published August 3, 2018

Roy and Leah are in their early 40s with three young children, a mortgage to pay off and a house in Toronto that is too small for a family of five. They want to add another storey at an estimated cost of $250,000.

Roy earns a healthy income in his information technology job, while Leah is working part-time. Together, they bring in about $166,000 a year. Their goal is to keep this work arrangement for as long as possible, Roy writes in an e-mail.

“Can we afford to do the house renovation with Leah still part-time?” Roy asks. The plan is for her to supervise the house renovation starting in the spring of 2019 and go back to work full-time in 2020. They’d have to borrow to finance the renovation.

They wonder what effect the additional debt will have on their retirement plans. “When can we comfortably retire?” Roy asks. He’s planning to work to the age of 65, although he’d naturally like to retire earlier. She plans to retire at the age of 60. They both have company pensions – his a defined contribution, hers a defined benefit.

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

What the expert says

Roy and Leah are facing the conundrum that many others in their position face, Mr. Ardrey says: balancing off life today with their retirement dreams of tomorrow.

“They want to find a way where Leah can remain working part-time, complete the $250,000 renovation to add a second floor to their house and still save enough for retirement.” There is little room in their budget for the added expense of carrying new debt, the planner says. That assumes the loan is amortized over 25 years at a cost of $14,000 a year, tilting them into a cash-flow deficit.

“If they could find a way to reduce their spending by $10,000 a year, both the renovation and the part-time work can co-exist,” Mr. Ardrey says. This seems unlikely. Instead, he looked at a more feasible option in which they delay the renovation until 2023 after Leah has returned to work full-time. “Or they could do the renovation now and Leah could return to full-time work now.”

In both scenarios, Mr. Ardrey included $2,500 a year for each child for education savings, a contribution of 6 per cent of salary to a defined contribution pension plan for Roy with a matching contribution from his employer and a top-up to his group registered retirement savings plan at work of $2,940 a year. Leah retires at the age of 60, as planned, with a pension of $59,725 and a bridge benefit of $7,642 from the age of 60 to 65, indexed to inflation. The planner assumes they will begin collecting full Canada Pension Plan and Old Age Security benefits at the age of 65.

In Scenario 1, where the renovation starts in 2023, they will have taken on substantial new debt, so their focus will be on paying it back, Mr. Ardrey says. “Being debt-free is a cornerstone to financial independence.”

All surplus will be directed toward debt, except for a pause between 2030 and 2032, when they will stop making additional mortgage payments and instead focus on their children’s postsecondary education costs because the registered education savings plan funds will be running out. That assumes education costs of $20,000 a year for each child, rising at 4 per cent a year or double the rate of inflation.

Lump-sum additional mortgage payments continue in 2033 until the debt is paid off in 2038. Roy retires the following year at the age of 65 and the cash flow surplus from that one year of $37,000 is saved in his tax-free savings account.

Their retirement expenses are $84,000 a year after tax in current dollars, plus $10,000 for travel to the age of 80. If they wanted to spend all their savings, leaving only their house, they could increase their retirement spending by $9,600 a year, rising with inflation, Mr. Ardrey says.

In Scenario 2, where Leah returns to work now, the focus would again be on debt repayment. By the time their children are in university, the mortgage will be lower so they will be able to make reduced lump-sum payments while they catch up with the education expenses.

“Paying down the debt earlier has a positive effect on Leah and Roy’s cash flow,” Mr. Ardrey says. They are debt-free by 2034, ahead of target. Roy can retire three years earlier than planned at the age of 62. Between 2034 and 2036, they use their surplus cash flow of $21,000 each to contribute to their TFSAs. They meet their retirement goal. If they wanted to leave only real estate behind, they could increase their spending by $6,000 a year. Although that is less than Scenario 1, Roy does retire three years earlier.

“Unfortunately, there are no magic bullets in retirement planning,” Mr. Ardrey says. “It usually comes down to working longer, saving more, spending less or investing better.”

Client situation

The People: Roy and Leah, both 43, and their three children, ages 7, 9 and 11.

The Problem: Can they afford to add a second storey to their house with Leah continuing to work part-time for a few more years?

The Plan: Either postpone the renovation until after Leah is back full time, or do it now and have her return to work immediately.

The Payoff: They avoid overextending themselves financially and having it affect their retirement plans.

Monthly net income: $10,610.

Assets: Cash in bank $1,000; his RRSP $58,735; his employer pension plan $182,600; estimated present value of her DB pension $208,890; RESP $111,815; residence $800,000. Total: $1.4-million

Monthly outlays: Mortgage $1,410; property tax $350; home insurance $85; utilities $285; maintenance $280; transportation $625; groceries $2,055; child care $400; clothing $200; line of credit $10; gifts, charity $350; vacation, travel $345; other discretionary $1,000; dining, drinks, entertainment $660; sports, hobbies $275; subscriptions, other $40; prescriptions $25; life insurance $140; phones, TV, internet $255; RRSP $115; RESP $625; pension plan contributions $1,040; professional association, group benefits $127. Total: $10,697.

Liabilities: $317,180; line of credit $4,000. Total: $321,180.

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

Q2 TriDelta Investment Review – Global Trade: Long Term Problems or Short Term Worries

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OVERVIEW

As we languish in summer heat, we feel anguish in summer Tweets.

If there has ever been a larger global megaphone than President Trump’s Twitter account, we don’t know what it is. While we try our best to ignore most of it in order to prevent overreactions when it comes to investing, the prospect of a major shift in U.S. global trade policy could have major investment implications.

In this report we will look at the risks but focus on why we believe the heightened trade tensions are temporary and not a long term structural change to the markets. We believe that NAFTA will get resolved with some notable wins for the United States, and most other ‘trade wars’ will settle down without significant changes.

We also review how TriDelta did and what we see going forward.

Global Trade – Where it is headed and who will be the winners and losers

Changes to the global trade order may start with President Trump, but the facts on trade will determine how it all ends.

Our views on what will happen to global trade are based on two key items. The first is the facts on trade; who the U.S. trades with, the respective trade balance with each of these countries and how reliant they are on one another for trade. Secondly, we look at how reliant each country is on the United States.
The second focus helps to truly understand President Trump’s end goals and negotiation strategies. So let’s review.

The United States has five major trading partners. The EU, China, Canada, Mexico, and Japan. These five partners represent 69% of all US foreign trade, and 86% of the U.S. trade deficit.

From the list below you can see the high level details.

US Trade in 2017 – Top 5 Trading Partners (according to the International Trade Administration) in USD millions.

Rank Country/District Exports Imports Total Trade Trade Balance
World 1,546,273 2,341,963 3,888,236 -795,690
1 European Union 283,269 434,633 717,902 -151,363
2 China 129,894 505,470 635,364 -375,576
3 Canada 282,265 299,319 581,584 -17,054
4 Mexico 243,314 314,267 557,581 -70,953
5 Japan 67,605 136,481 204,086 -68,876

When it comes to Donald Trump’s approach, he wrote about his 11 winning negotiation tactics in his 1987 book The Art of the Deal.

His first one was:
Think big

“I like thinking big. I always have. To me it’s very simple: if you’re going to be thinking anyway, you might as well think big.”

He has said consistently that he believes that the U.S. has been taken advantage of on trade and that he will put a stop to that. If he is going to do that he will focus on his biggest trading partners and he will start by asking for everything.

Another key item on Trump’s list is pretty common for most negotiations. He wants to find points of leverage and during negotiations to act as cool as possible – showing no interest or worry about resolving matters.

Use your leverage

“The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead.”

If the U.S. wants leverage from its trading partners, the two easiest countries on the top 5 list would be Mexico and Canada. For Mexico, 81.0% of its exports go to the U.S.. For Canada, the number is 76.4%. Mexico and Canada need the U.S. in a big way.

On the flip side, the percentage of U.S. exports going to Canada is 18% and it is 16% for Mexico.

Percentage of a countries exports that go to the United States:

Mexico 81.0%
Canada 76.4%
Japan 20.2%
China 18.2%
India 16.0%

Another of Trump’s tactics is:
Get the word out

“One thing I’ve learned about the press is that they’re always hungry for a good story, and the more sensational the better…The point is that if you are a little different, a little outrageous, or if you do things that are bold or controversial, the press is going to write about you.”
Clearly, Trump can use the media to get his side of the story out in a loud and large way. For us it remains important not to put too much stock in individual comments that Trump makes when it comes to trade issues. He will say anything to keep the focus on him and his issues.

Fight back

“In most cases I’m very easy to get along with. I’m very good to people who are good to me. But when people treat me badly or unfairly or try to take advantage of me, my general attitude, all my life, has been to fight back very hard.”
This can certainly explain his reaction to Trudeau and others. It is par for the course with Trump, and while the personal attacks are unseemly, they are not likely to lead anywhere as long as there is real negotiation leverage to fall back on.

This now brings us to China. For China, the U.S. is its largest trading partner, and represents 18% of exports and 9% of imports, but as you can see from these numbers, the Chinese economy is fairly diverse and not overly reliant on the U.S. In fact, 80% of China’s GDP is from domestic consumption. Purely based on the numbers, the United States doesn’t have nearly as much leverage with China as it has with Canada and Mexico. To top it off, China is the largest foreign holder of U.S. debt at over $1.5 trillion. Needless to say, the United States needs to be careful in its negotiations with China.

Basically, we see NAFTA as something that will end up being resolved, likely with some clear wins for the United States. The threats, loud complaints, and the personal attacks do not worry us. They are all on the Trump negotiating tactic list. If we had to guess, one potential loser from a NAFTA agreement will be the Dairy Industry in Canada as it has been the centerpiece of many Trump attacks and one that he will most want to raise as a sign of victory. Keep in mind that many Canadians themselves criticize the structure, high costs and unfairness of the Canadian dairy industry.

At the end of the day, Canada and Mexico are negotiating from a point of weakness and ultimately may give more than they want in order to get a deal done. But it should be noted that despite no tax cuts in Canada and with the uncertainty of trade, Canadian GDP growth is expected to be quite strong in the second half of the year.

When it comes to China and trade imbalances, the United States simply does not have the leverage to win this trade war. Where Canada and Mexico need the U.S. more than the other way around, that simply isn’t the case with China. If only 20% of China’s GDP are exports, and the U.S. is 18% of its exports, that means the U.S. market represents only 3.6% of China’s GDP. Because he holds the loudest megaphone, Trump can still claim victories along the way, but when it comes to China, the U.S. is fighting a battle that they won’t win. The one exception is in technology and intellectual property as is evidenced by the action against Chinese giant Tencent. China is reliant on US technology, particularly semiconductors, to fuel its growth and this is an area where concessions can be earned.

We think their discussions with the EU may be a little more productive, but will most likely end up closer to status quo than see any major wins for either side.

This leads to one of Trumps final negotiation tactics:
Maximize the options

“I never get too attached to one deal or one approach. I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first.”
This tells us that while Trump may go after every big region to try and negotiate a better deal, he recognizes that he won’t win them all. From an investment risk perspective, it means that we should be less worried about Trump fighting five different trade wars at once. Once he has a big win he can ‘Trump-et’, the others may fade.

TriDelta’s View of the Risk of Global Trade Wars

In summary, we believe that NAFTA will get resolved and Trump will claim a big trade victory, but it should only negatively impact a few select sectors. He can use this as proof that he is a good negotiator and that he is winning points for America. This may take pressure off of him on other global trade deals that the U.S. can’t win to any great extent.

While trade tensions may cause turmoil, we do not believe it will bring on impending market doom.

How Did TriDelta do in Q2 and over the first half of the year?

The TriDelta Growth Fund has had a strong run. It was up 3.0% in Q2 and up 5.6% over the first six months of 2018.

The TriDelta Pension Fund which focuses on dividend growing stocks and is a lower volatility fund, has seen slower growth after a couple of very good years. It was up 2.2% in Q2 and up 2.8% over the first six months.
The TriDelta Fixed Income Fund was up 0.4% in Q2 and 1.1% in the first six months.

The TriDelta High Income Balanced Fund was up 3.2% in Q2 and 3.3% in the first six months of the year.

Overall most clients are up between 1.5% and 4% year to date depending on their asset mix.

By comparison, the TSX was up 1.9% in the first half of the year, the Canadian Bond Universe was up 0.6% year to date to June 30th, while the S&P 500 in Canadian dollars was up 7.7%. Global equities outside of the U.S. have been mostly negative this year.

We continue to be pleased with how our portfolios have been able to smooth out much of the market volatility that we have seen over the past 6 months. Most clients experienced losses of less than 1% in February when the S&P500 experienced a short term loss of 13%. At TriDelta, the more we can avoid those declines in the first place, it makes it easier to stick to and achieve the long term plans. By reducing volatility, stress is reduced, and more rational investment decisions can be made.

Central Banks, Interest Rates and Bond Markets

Central Banks

Bank of Canada governor Stephen Poloz, with his extensive background in trade-related issues and global trade contacts from his prior post at the Export Development Corporation, is perhaps best suited of all the embroiled nations’ bankers to assess what the escalating trade war with United States means. The announced tariffs on metals and other goods between the two nations implies that consumer prices are set to rise in the coming months. As the anticipated “loser” in any trade battle with the US, the very real prospect of a weaker Canadian dollar could also be the source of further inflationary pressure as buying foreign goods becomes relatively more expensive. Typically, a central bank will raise interest rates to keep inflation at a comfortable level. In the past, however, the Bank of Canada has recognized that certain types of inflation are not responsive to adjustments in its overnight rate and is likely to regard tariff- and currency-related price increases as a one-time “supply shock”. Furthermore, as a relatively small and open economy that derives 25 percent of its economic activity from exports to the U.S., Poloz must also contemplate a downgrade to near-term growth estimates and be less likely to raise rates at the margin as a result.

The conundrum faced by the U.S. Federal Reserve is somewhat more complicated. With unemployment at a 20 year low, the economy expanding at a nearly four percent annualized rate in the current quarter, more fiscal tailwinds on the way and some inflation measures already at the high end of its comfort zone, the Fed has signaled its intention to continue to gradually raise interest rates.

Although the Congress is divided on the evolving tariff policy, it has shown a proclivity to tax cuts and spending and could opt for more of the same to cushion any economic drag – particularly as they are a few months away from what promises to be a hotly-contested mid-term federal election.

Bond Market Response

Understandably, risk appetite in fixed income markets diminished as the second quarter drew to a close. Nevertheless, corporate bonds in North America managed to approximately return their running yield (meaning little change on bond prices). Government bonds themselves, after a mid-quarter test of the three percent yield level on US government ten-year bonds, retraced their path to settle down slightly for the quarter. We anticipate some more volatility while the trade representatives work begrudgingly towards compromises that are politically palatable in their respective countries. Risks to that view include a meaningful increase in inflation expectations amongst US consumers, which might prompt the Federal Reserve to raise rates more aggressively. There is also the potential for China state-owned entities to sell US treasury bonds in large quantities as a means of retaliating against tariff action and defending its own currency, which has come under pressure in recent weeks.

Stock Markets

In the stock markets, given our belief that heightened trade tensions are temporary and not a long term structural change to the markets, we believe that there will likely be some relief rallies as trade news improves.

Despite this view, we stand ready to react if things do continue to escalate. We would increase cash and sell calls into higher volatility in order to generate income. This speaks to good investment management in general. You develop a core thesis and manage to that expectation, however, you always acknowledge that things change and you need to be ready to quickly change your investment approach as the facts come in.

As far as individual names or sectors are concerned, TriDelta has a disciplined process that starts with equity screens that focus on selecting companies with attributes that outperform over time. The increase in tariffs can artificially impact earnings (positive or negative). As a result, when we look at key factors such as earnings estimate changes, growth in earnings and earnings based valuation metrics, more scrutiny is needed when evaluating a company to determine if recent increases or decreases in these key variables are affected by the addition or removal of tariffs.

These are the key items and thinking that is keeping us busy on the investment management front.

SUMMARY

The biggest megaphone doesn’t mean the most important news. Today, global trade wars and threats are the loudest stories, yet by studying the situation a little deeper, we believe that we can be a step ahead of these issues as they develop.

We hope that you have a great rest of the summer, and we thank you for your continued trust.

 

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

FINANCIAL FACELIFT: Returning Canadians aim to manage competing goals of travel, saving, retirement

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Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their 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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published June 22, 2018

Cottage in Muskoka

After working in the United States for a spell, Joyce and Bill are back in Canada and wondering how to allocate their income to meet competing goals. He is 41, she is 42. They have two children, ages 4 and 6.

Bill makes about $260,000 a year, including bonus, working for an international company. Joyce earns about $45,000 a year working part time in the health-care field. Their goal is to retire at 58 with $90,000 a year after tax.

In the meantime, they want to buy a cottage, take a month-long vacation with the children, pay off the mortgage on their B.C. house and ensure they save enough money for their children’s education.

They have more than $100,000 sitting in the bank and are wondering what to do with it: top up their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), buy a vacation property, or pay down some of the $800,000-plus mortgage.

“We would like to retire in 17 years,” Bill writes in an e-mail. “How can we make this a reality?”

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

What the expert says

The first and most obvious challenge for Bill and Joyce is budgeting, Mr. Ardrey says. They do not seem to know where their money is going. “They need to get a solid understanding of their spending and ability to save. This is a cornerstone of their financial plan.”

Short term, Joyce and Bill plan to buy a cottage for $300,000 in about three years and take a big vacation this year costing $20,000. They are trying to decide how to use the $100,000 or so they have in the bank.

Bill has about $82,000 of unused RRSP room and Joyce $33,000 of TFSA room, the planner notes. “Based on their tax rates, these are the areas in which to focus their investments,” Mr. Ardrey says. In 2018, he assumes $33,000 goes to Joyce’s TFSA, $40,000 to Bill’s RRSP, and $20,000 to vacation expenses.

From the RRSP contribution Bill will get a $20,000 tax refund, which will go to savings. “In addition, the monthly surplus of $1,800 continues to accumulate for their short-term goals.” In 2019, Bill contributes another $40,000 to his RRSP, generating another $20,000 refund.

In 2021, they buy a cottage for $300,000 with a down payment of $75,000 and mortgage of $225,000. They expect to rent it out for a good portion of the year. He assumes a net rental income after expenses of $1,000 a month. “The property being a rental would also have the benefit of making the mortgage partly tax deductible.”

After 2021, Bill and Joyce start to focus on their longer-term goals, which include paying off their mortgage. The $1,800 of monthly savings is now assumed to go to additional payments on their mortgage. “With this strategy, they should pay off their mortgage by 2032, which is just before they plan to retire.”

Once the mortgage is paid off, the planner has them taking the $1,800 a month surplus, plus the $3,790 a month that had been going to the mortgage, and putting it toward longer-term savings.

Bill and Joyce want to provide for their children’s postsecondary education. Mr. Ardrey assumes an annual cost of $20,000 for each child. Education costs are forecast to rise by 4 per cent a year, double the inflation rate. They contribute $2,500 a year for each child to a registered education savings plan until the children turn 18. Even so, they will fall short. “By allocating about half of their postmortgage surplus to these costs, they will be able to foot the bill.”

The plan assumes that Bill continues to take full advantage of his RRSP contribution room, that he and his employer continue making contributions to his deferred profit sharing plan at work, and that both Bill and Joyce contribute the maximum to their TFSAs for the rest of their lives.

The final part of the plan is their investments, which historically have returned 4.83 per cent a year before fees. Mr. Ardrey assumes this drops to 4.28 per cent a year after they have retired and shifted to more conservative investments.

“Based on these assumptions, Bill and Joyce cannot meet their goal,” he says. “They exhaust their investment assets by age 82.” If they sold their cottage at that point, the extra capital would tide them over another five years to age 87. At this point they could sell their house and downsize.

Instead, he recommends they diversify their investment portfolio to include some alternative investments such as funds that hold private debt, global real estate, and accounts receivable factoring to boost their returns and offset stock market cycles. Their existing portfolio holds mainly stock funds and real estate investment trusts (REITs).

“A market correction at the wrong time could really have a significant impact on their ability to retire.” He recommends a portfolio of 70 per cent stocks, 20 per cent alternative investments and 10-per-cent fixed income, with the equity portion falling and the fixed-income rising as they near retirement.

“This portfolio should produce a 6.5-per-cent rate of return before investment costs of 1.5 per cent, providing a net return of 5 per cent,” Mr. Ardrey says – enough to allow Bill and Joyce to achieve their retirement goals.

Client situation

The People: Bill and Joyce, in their early 40s, and their two children.

The Problem: How to catch up with savings and investments now that they are back in Canada.

The Plan: Direct cash and surplus to Bill’s RRSP and Joyce’s TFSA for the tax benefits. After the mortgage has been paid off, redirect the surplus first to the children’s RESP. Review investment portfolio.

The Payoff: A better chance of achieving all their financial goals.

Monthly net income: $16,870.

Assets: Joint account $104,000; cash $2,500; stocks $13,500; U.S. retirement savings $174,261; his TFSA $36,140; her TFSA $7,100; his RRSP $172,970; her RRSP $35,350; commuted value of her DB pension $40,000; RESP $13,300; residence $1,360,000. Total: $1.96-million.

Monthly outlays: Mortgage $3,790; property tax $435; water $130; home insurance $75; heat, hydro $250; maintenance, garden $275; transportation $410; groceries $1,200; child care $785; clothing $425; gifts, charity $135; vacation, travel $835; dining, drinks, entertainment $510; subscriptions $35; other personal $600; TV, internet $145; spending that is unaccounted for $1,870. Total lifestyle spending: $11,905.

Plus: RRSP $400; RESP $415; TFSAs $915; his and his employer’s group pension plan contributions $1,435. Total Savings: $3,165. Total monthly outlays: $15,070. Surplus: $1,800.

Liabilities: Mortgage $808,475 at 2.8 per cent.

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

FINANCIAL FACELIFT: This couple making $258,000 a year are worried they are paying too much in investment fees as their retirement nears

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Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their 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.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published June 1, 2018

Darryl and Don hope to hang up their hats in four years when Don will be entitled to an unreduced pension. When they do, they’re thinking of selling their Toronto house, moving to Victoria and travelling extensively, Darryl writes in an e-mail.

Darryl is age 52, Don is 53. Together, they bring in about $258,000 a year. While Don has a public sector work pension, Darryl has a group registered retirement savings plan at work, to which his company contributes, as well as a personal RRSP.

Their retirement spending goal is $100,000 a year after tax, a lot more than they are spending now, excluding savings. They wonder whether they are on track to achieve this. They wonder, too, about the investment fees they are paying their mutual fund company and whether they are getting value for their money.

“We’re not sure we are getting maximum return on our investments,” Darryl writes. (They are in a wrap program for which they are being charged advisory fees plus management expense ratios on the underlying mutual funds.) “Also, there was sticker shock when the adviser fees were disclosed, and we have a sense that we are overpaying.”

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

What the expert says

Darryl and Don are saving substantial sums for their retirement, Mr. Ardrey says. Darryl contributes 7 per cent of his salary to his group RRSP and his employer another 6 per cent. As well, he contributes to his personal RRSP. Don contributes about $12,400 a year to his defined benefit pension plan and tops up his RRSP to the tune of $2,500 a year.

Based on the numbers they provided, they are showing a substantial surplus in their monthly budget, Mr. Ardrey notes. They admit they may have underestimated their current spending by a bit, the planner says.

“This is where their ability to review their budget and create a realistic savings plan becomes important.” If their budget is “only marginally off, the effect would be minimal,” Mr. Ardrey says. “But if they are significantly off, the effect will be substantial.”

Darryl and Don figure they will pay about the same for the West Coast house as they net from the Toronto one. In his calculations, the planner assumes they sell for $800,000, net $700,000 after selling costs and use the proceeds to buy the Victoria house for cash.

In 2022, when Don begins drawing his pension, he will get about $49,000 a year, plus a bridge benefit of $6,800 a year to the age of 65. Mr. Ardrey assumes both begin collecting Canada Pension Plan and Old Age Security benefits at the age of 65.

In his calculations, the planner assumes an inflation rate of 2 per cent a year.

Looking at their investments, Mr. Ardrey says the historical rate of return on the asset classes they hold has been 4.91 per cent a year. They are paying 2.25 per cent a year in management expense ratios and fees. That means they are getting a meagre 0.66 per cent annual return after inflation and fees.

Even so, Don and Darryl will still achieve their retirement spending goal with money to spare. At the age of 90, they will have assets of about $2.5-million, of which $750,000 is liquid. If they spent all of their savings, leaving only their residence, they could increase their retirement spending by $6,000 a year to $106,000.

Darryl and Don have about 80 per cent of their portfolio in stocks. This is high given that they are looking to retire in only four more years. If the stock market were to plunge like it did in 2008-09, “it could have a catastrophic impact on their portfolio and delay their retirement.”

Instead, Mr. Ardrey suggests they increase their fixed-income holdings to 30 per cent. He recommends another 20 per cent in income producing, alternative investments (funds, pools or limited partnerships) that specialize in mortgages, global real estate, private debt and factoring, that is, the purchasing of business accounts receivable. These strategies should produce higher returns than fixed income while having little or no correlation to the stock markets, the planner adds.

Altogether, this new portfolio should achieve a return of 6.5 per cent a year. If they switch to an investment counselling firm, lowering their costs to 1.5 per cent a year (from 2.25 per cent), their real return after inflation would jump to 3 per cent a year.

When they move, Darryl and Don should look at redoing their wills and powers of attorney, or at least consulting with a B.C. lawyer to ensure the documents they have will work in British Columbia, Mr. Ardrey says. He suggests they hold their non-registered investments jointly so that the holdings pass automatically to the survivor without going through the will to reduce their exposure to provincial probate tax. “As an example, on $1-million of assets, probate would be $14,000 in British Columbia.”

Client situation

The people: Darryl, 52, and Don, 53

The problem: Can they pack it in and move to British Columbia in four years, buy a house and still have $100,000 a year after tax?

The plan: Review their budget in case their monthly outlays below are substantially understated. Diversify their asset allocation and take steps to lower their investment costs. Review estate planning after the move.

The payoff: Financial peace of mind

Monthly net income: $16,012

Assets: Cash $15,000; Don’s non-registered savings $85,365; Darryl’s TFSA $62,515; Don’s TFSA $69,250; Darryl’s combined RRSPs $589,820; Don’s  RRSP $115,155; estimated present value of Don’s DB pension: $389,700; residence $800,000. Total: $2.1-million

Monthly outlays: Property tax $395; home insurance $145; utilities $940; maintenance $665; garden $200; transportation $450; grocery store $1,000; clothing $50; charitable $30; vacation, travel $415; dining, drinks, entertainment $565; grooming $10; vitamins and supplements $5; life insurance $75; phones, TV, internet $365; RRSPs $2,380; TFSAs $915; Don’s pension plan contributions $1,035. Total: $9,640

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
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