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FINANCIAL FACELIFT: Should this couple sell their house for a better 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 identities. 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:
Special to The Globe and Mail
Published March 29, 2019

“Will we have to sell our house to finance our retirement years?” Tom and Tilly ask in an e-mail.

It’s a question that comes up frequently from people nearing that age when they plan to leave the workforce for good. Tom is 59, Tilly 60.

They’ve had conflicting advice from their current and former financial advisers. Their former adviser said they’ll have to sell their Hamilton-area home in 10 years. The new one says that won’t be necessary.

Tom earns about $137,000 a year working for a non-profit. Tilly has gone back to school to satisfy her love of learning and potentially give her part-time income later on. Her tuition is covered by a scholarship.

They wonder whether Tom can afford to hang up his hat in three years or so. He has a group registered retirement savings plan to which he and his employer both contribute. Tilly has a defined-benefit pension plan from a previous employer that will pay $12,090 a year starting at age 65, indexed to inflation.

Their retirement spending target is $75,000 a year after tax, about $15,000 of which is for travel. Before then, they need to fix up their house a bit and replace one of their cars.

“Are we on track?” they wonder.

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

What the expert says

Tom is saving $1,100 a month to a group RRSP, to which his employer contributes $630 a month, Mr. Ardrey says. They are each saving $700 a month to their tax-free savings accounts. Mr. Ardrey assumes they continue saving this amount until Tom retires, after which the RRSP savings cease and the TFSA contributions fall to $500 a month each.

They have a cash-flow surplus of about $1,400 a month, which they are saving to pay for $25,000 of home renovations and to replace a car for another $25,000.

The planner assumes they begin collecting Canada Pension Plan and Old Age Security benefits at age 65, about 70 per cent of maximum CPP for Tilly and 90 per cent for Tom. He recommends they apply to share their CPP to help lower their taxes. At age 65, Tilly will begin collecting her pension.

Because parents of both Tom and Tilly lived well into their 90s, Mr. Ardrey assumes they will both live to age 95.

Looking at their investments, their asset mix has a historical rate of return of 4.4 per cent, with an average management expense ratio of 1.3 per cent, for a net return of 3.1 per cent.

“Based on these assumptions, Tom and Tilly can meet their retirement spending goals but with minimal financial cushion,” Mr. Ardrey says. That assumes Tom, who turns 60 later this year, retires at age 63. If they spend all of their investment assets, leaving only real estate and personal effects, they will have a cushion of only $2,400 a year.

“This is right on the line of success or failure,” the planner cautions. “Any one large, unexpected expense could have a significant impact on their retirement plan.”

If they sold their house, now valued at about $675,000, and downsized to a $400,000 condo at Tom’s age 85, “they would greatly increase their financial flexibility,” Mr. Ardrey says. This would give them a financial cushion of $9,000 a year. It would also give them the option of retiring earlier than planned.

An alternative would be to try to improve their investment returns. They are investing mainly through mutual funds. Given the size of their portfolio, they could benefit from using the services of an investment counsellor – particularly one who offers alternative income strategies as part of their overall asset mix, Mr. Ardrey says.

Although investment returns are not guaranteed, alternatives to stocks and bonds – funds that specialize in such things as private debt, global real estate and accounts receivable factoring – could potentially enhance returns on the fixed-income side of their portfolio while having little or no correlation to stock markets, Mr. Ardrey says. “They represent a unique diversifier.”

Their current asset mix is 40-per-cent fixed income, 20-per-cent Canadian, 15-per-cent U.S. and 25-per-cent international stock funds. He recommends 25-per-cent fixed income, 25-per-cent alternative income and 50-per-cent globally diversified stock funds. “With this new asset mix in place, we would expect a return of 6.5 per cent and investment costs of 1.5 per cent, for a net return of 5 per cent a year.”

If Tom and Tilly achieved this rate of return and downsized their house when Tom is 85, they could have a substantial cushion, the planner says: $19,200 a year. If they wanted to, they could retire when Tom turns 61 in 2020 and still have a cushion of $9,000 a year.

Client situation

The people: Tom, 59, and Tilly, 60

The problem: Will they have to sell their house to finance their retirement?

The plan: Try to improve investment returns, but keep an open mind to selling the house and downsizing in 25 years or so.

The payoff: Retiring as planned with a comfortable financial cushion.

Monthly net income: $8,455

Assets: Cash in bank $60,000; his personal and group RRSPs $395,000; her RRSP $245,500; his TFSA $44,500; her TFSA $37,000; estimated present value of her DB pension plan $187,250; residence $675,000. Total: $1.6-million

Monthly outlays: Property tax $460; home insurance $90; utilities $285; maintenance, garden $75; transportation $580; groceries $650; clothing $205; gifts, charity $250; vacation, travel $700; other discretionary $50; dining, drinks, entertainment $600; personal care $100; subscriptions $30; dentists, drugstore $20; life insurance $185; phones, TV, internet $270; his group RRSP $1,100; TFSAs $1,400. Total: $7,050Surplus $1,405

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: To buy or rent a condo? Montreal couple search best route for saving towards 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 identities. 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: CHRISTINNE MUSCHI
Special to The Globe and Mail
Published March 8, 2019

To buy or not to buy, that is the question for Ron and Rosemary, a couple living and renting in the Montreal area.

Ron is 43 and works as a project manager, Rosemary is 35 and works for a non-profit. Together they bring in about $190,000 a year. They’re considering a condo rather than a house because it would require less upkeep. They have no plans to have children.

Their question: Which is better, buying a condo in the $600,000 range “or continuing to rent throughout our lives?” Rosemary asks in an e-mail. “If we continue to rent, we would definitely be looking at renting a unit in a newer building with all of the amenities we want, possibly pushing the rental price per month to $2,500 or higher,” she adds.

Longer term, they are concerned about saving for retirement. Their postwork spending goal is $100,000 a year after tax, rising with inflation.

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

What the expert says

First, Mr. Ardrey looks at a scenario in which they continue to rent. They would move to a building with better amenities, increasing their rent by $500 a month to $2,500 a month, he notes. All other expenses would remain the same. The planner’s assumptions are based on a life expectancy of 90 for both.

Ron is contributing $645 or 8 per cent of his salary to a defined contribution pension plan with a 6-per-cent company match. Rosemary is contributing $475 a month to an RRSP with a $475-a-month match from her employer. They are stashing away another $1,000 a month in a bank account.

If they decide not to buy, the planner assumes they would transfer the $39,900 they have in their bank account to their tax-free savings accounts. Their budget allows for additional TFSA contributions of $500 a month each, money that is now going toward a down payment.

Ron plans to retire at 65 and Rosemary at 70. When they do, they will receive Canada Pension Plan and Old Age Security benefits. Because Ron is an immigrant to Canada, the plan assumes he will get 80 per cent of maximum CPP and OAS. Rosemary will receive 100 per cent. In addition, her monthly CPP benefit will be 42-per-cent higher than if she had started receiving it at 65.

Mr. Ardrey looks at the couple’s investments. Based on their current portfolio structure, they have a historical average rate of return of 4.4 per cent. The average investment cost of their portfolio, excluding Ron’s DC pension plan, is 1.7 per cent, leaving them a net return of 2.7 per cent. After inflation, forecast to be 2 per cent, their real rate of return is 0.7 per cent.

In retirement, Rosemary and Ron want to spend $100,000 a year. “Based on the assumptions above, they fall slightly short of their goals, running out of funds near the end of Rosemary’s life,” Mr. Ardrey says. If they cut their spending a bit, they could reach their goal, but they would have “zero financial cushion.”

Now he looks at a scenario in which they buy a condo for $600,000. They have almost $40,000 saved, so they will need a mortgage for $560,000 at an estimated 3.5 per cent, amortized over 25 years. Their payments would be about $2,570 a month.

Offsetting the mortgage expense is the fact they would no longer be paying rent. Living expenses in retirement would be $76,000 a year after the mortgage is paid off, substantially less than if they were still paying rent. Any budget surplus is assumed to be saved to the TFSAs each year.

“Based on these assumptions, Rosemary and Ron can reach their retirement goal,” Mr. Ardrey says. Not having to pay rent when they retire “is a major factor,” he notes. This cost reduction more than offsets the reduction in savings.

If they decided to spend all of their investment assets, leaving only their real estate and personal effects, they could increase their spending by $1,000 a month, inflation adjusted, the planner says.

“So of the two scenarios, the decision to purchase the condo is the financially preferred one,” he concludes. “In addition to the cash flow numbers being stronger, Rosemary and Ron would also have a real estate asset that in an emergency they could borrow against or sell if need be.”

Finally, Ron and Rosemary should review their investment strategy to improve their investment returns and lower their costs, Mr. Ardrey says. Their current asset mix is about 90-per-cent stocks and stock funds, and 10-per-cent cash and fixed income.

Instead, he recommends 65 per cent stocks and stock funds, 25 per cent alternative income investments and 10 per cent fixed income. Alternative income funds – which can be bought through an investment counselling firm – include strategies such as private debt, global real estate and accounts receivable factoring. “This would broaden their diversification into an asset class that has historical returns of 7 to 9 per cent a year and little to no correlation to equity markets,” the planner says.

Making this change could increase their returns to 6.5 per cent and reduce investment costs to 1.5 per cent.

The difference would be material. “If they remain renters, then they go from falling just short to being able to increase their retirement spending by $18,000 per year,” the planner says. In the condo scenario, the potential for extra spending would be even greater.

Client situation

The people: Ron, 43, and Rosemary, 35

The problem: Should they rent or buy?

The plan: Go ahead and buy the condo, but review investments to diversify their holdings, potentially improve returns and lower investment costs.

The payoff: Retirement goals met with a financial cushion besides.

Monthly net income: $10,800

Assets: Cash $39,900; her TFSA $5,470; his TFSA $5,300; her RRSP $88,030; his RRSP $79,030; market value of his defined contribution pension plan $10,000. Total: $227,730

Monthly outlays: Rent $2,000; tenant insurance $25; utilities $180; furnishings, decorating, maintenance $350; transportation $605; grocery store $900; clothing $320; gifts, charity $1,000, vacation, travel $1,000; dining, drinks, entertaining $900; personal care $350; pets $115; sports, hobbies $490; dentists $50; drugstore $10; phones, TV, internet $340; his DC pension plan $645; her RRSP $475. Total: $9,755 Surplus goes to saving.

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

Retirement Shouldn’t be a Taxing Transition

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When people think of retirement, they make think of relaxing at the cottage, traveling the world, or maybe with the recent blasts of winter we have been receiving, spending some time in warmer climates. What most people don’t think about is how my taxes are going to change. Yes, with April just around the corner, it is time to think about taxes and how they will affect you in retirement could be the difference from lying on a beach in February and shoveling your driveway for the fifth time this week.

If like many Canadians, you are a couple where both spouses work, the opportunities to split income are few and far between. In retirement that changes for the better. A number of years ago the government introduced legislation that allows pension income to be split between spouses. If you are already the lucky recipient of income from a defined benefit (DB) pension plan, you can further benefit by splitting up to 50% of this income with your spouse. The obvious benefit to this is the lower income spouse would pay less tax on the pension income than the higher income spouse.  Also, he/she would now receive the pension credit, which is a non-refundable federal tax credit that maxes out at $2,000. So depending on the disparity of the tax rates between spouses and size of the pension, this could be a material benefit to their tax returns saving thousands of dollars a year in taxes.

Ok, that is great for those Canadians who have a pension, but what about the rest of us?

Once a taxpayer is over the age of 65, they can split life annuity, RRIF and LIF income in the same manner as DB pension income. This can lead to some interesting tax planning for someone who is doing a RRSP meltdown strategy. If one spouse has a much larger RRSP/RRIF than the other, they can double the meltdown amount by taking it from a RRIF instead of a RRSP after the age of 65. In doing this, the RRSP (or RRIF in this case) meltdown strategy could be extended to age 70, with CPP and OAS deferrals.

Other benefits to income splitting include being able to claim the age amount tax credit and possibly reducing or eliminating OAS clawback.

The mechanism for doing this in your taxes is relatively straightforward and does not have to be implemented until you file your taxes the following April. There is a form T1032 in your tax return where you make the pension election. Most tax software these days will do the calculation for you. Once all of your other information is entered for you and your spouse, the software will optimize the pension splitting between spouses. Even if you both have a pension, it can do this for you.

The topic of income splitting continues with your government pensions. Though OAS is not eligible to be shared, the CPP is. You and your spouse can apply to share your CPPs. You both have to be contributors at some point in your lives and both be receiving the pension. The amount eligible to share is based on your joint contributory period, which is just a fancy way of saying the time you were married or cohabitating. The benefit increases with the difference between CPP payment amounts.

While we are on the topic of CPP, I thought it was important to mention the child rearing drop out provision. Unlike the general drop out provision, which is calculated automatically, the child rearing must be applied for.

How does it work?

Let’s take you back to grade school where we learned about fractions. The CPP you receive is a fraction of the maximum payable, ignoring any early penalties or deferring benefits. The total number of years is 47 (age 18-65). The general drop out provision eliminates the lowest eight, making the denominator 39. Any year you make the maximum contribution you get a 1 in the numerator and if not, then a number between 0 to less than 1.

The child rearing drop out provision allows a spouse who may have stopped or reduced their work due to child care, to eliminate up to seven years per child (no double counting years if you have children close in age). The benefit is any year that has less than a 1 in the numerator that is eliminated, will increase the overall CPP payable to you.

Another tax surprise for many retirees is tax installments. If you were self-employed, you will be familiar with these, but many salaried employees are not. Tax installments are requested by CRA once your taxes payable less your taxes deducted at source exceed $3,000. While working, your employer took taxes at source. In addition, you probably had RRSP deductions and other things that reduced your taxes or generated you a refund. Now with RRIF payments, CPP, OAS and other incomes, you may end up owing taxes.

CRA wants to get its taxes earlier rather than waiting until April. So it will request them of you in four quarterly installments over the year. This is CRA’s estimate of what you will owe this year based on previous years’ filings. You can choose to pay what they request or not if you feel your situation is different this year. But be warned, if you underpay your taxes you will be charged installment interest. If you overpay them, CRA does not pay you any interest on the overpayment. Nice work if you can get it!

After all this talk of taxes, maybe all you do want to do is lie on a beach or somewhere warm.

When you do, if you are like many Canadians, you will head to our neighbours to the south. However, before you do, consider some of the tax implications of doing so.

If you fall in love with the warm weather, you may be tempted to purchase a vacation home in the U.S. In doing so, you have opened yourself up to U.S. Estate Tax exposure. By owning U.S. real property, you are considered to have U.S. situs property, which falls under the U.S. estate tax laws. The likelihood that you will end up paying any estate tax these days is low because of the increase threshold limits, but consult someone familiar with the rules before making a purchase.

Another exposure with spending time in the U.S., is actually the time you spend in the U.S. The U.S. has a substantial presence test where they could deem you a resident for U.S. tax purposes if the calculation shows you spent over 182 days there in the past three years.

Consider the calculation for someone who spends 4 months (120 days) in the U.S. per year.

Current Year each day counts as 1 = 120 X 1 = 120
Previous Year each day counts as 1/3 = 120 X 1/3 = 40
Second Previous Year each day counts as 1/6 = 120 X 1/6 = 20

Thus, by spending four months in the U.S., this person’s substantial presence test calculation is at 180 days, very close to the threshold.

In cases, where you plan to spend a significant amount of time in the U.S. each year, you should file a U.S. form 8840, Closer Connection Form. This form establishes that even though you spend a substantial amount of time in the U.S., your connection to and therefore tax filing obligation is to Canada.

So thought the pressures of work may be days gone by, the tax complexity often ramps up in retirement. Make sure you are set up to optimize your tax situation in retirement, as proper planning can allow you to have your fun in the sun instead of being left out in the cold.

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

FINANCIAL FACELIFT: With ambitious retirement goals, will this couple have enough to meet their lifestyle needs?

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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 identities. 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 January 18, 2019

Shawn and Sharon plan to retire together in a year or so, leaving jobs that pay a combined $195,885 a year. He is 59, she is 56.

Shawn has a defined benefit pension plan that will pay him about $21,000 a year starting in 2020. Both have substantial sums in defined contribution pension plans, which depend on financial market performance for their value. Shawn’s is from a previous employer.

They have a house in Saskatchewan with a mortgage and two grown children, one of whom is living at home. They are helping one of the children pay off a student loan.

Their retirement goals are ambitious: winters down south, frequent trips to visit family and some overseas travel, as well. This leads them to a spending target of $90,000 a year for the first 10 years, falling thereafter. Their plan to retire early would require them to draw heavily on their DC pension plans in the first few years.

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Shawn and Sharon’s situation.

What the expert says

Mr. Ardrey looks at how Shawn and Sharon would fare if they retired in a year and a half – on June 1, 2020 – and deferred Canada Pension Plan benefits to age 65 as planned.

Further saving potential is limited. While they show a surplus in their cash-flow statement, this money is going to travel and helping their son pay off his student loan, the planner notes.

When Shawn retires, he will get $21,000 a year from his DB pension plan. They will retire with a mortgage and line of credit outstanding, Mr. Ardrey notes. The mortgage of $126,000 is scheduled to be paid off by November, 2024, and the $10,000 line of credit by October, 2020.

“Once they retire, they will need to draw on their registered assets almost immediately,” Mr. Ardrey says. Their DC pension plans are a bit different from most. Usually DC pension plans are converted into locked-in retirement accounts (LIRA) when a person retires and then to a life income fund (LIF) when they begin drawing a pension. Sharon’s DC plan can stay with the Saskatchewan government’s Public Employees Pension Plan administration and be transferred to what is known as a variable pension benefit account. Or it can be transferred out to what is known as a prescribed registered retirement income fund (PRRIF). Shawn’s locked-in retirement account (from his DC plan) can be transferred into a PRRIF as well.

The advantage of a PRRIF is that you can take locked-in money from a pension (a LIRA) between the ages of 55 and 72 instead of putting it into a LIF, which has maximum withdrawal restrictions. “So essentially, it is allowing locked-in money to be used like regular RRIF money” from an RRSP, the planner says.

“The advantage here is that there are no maximum withdrawals in these accounts, allowing them the necessary financial flexibility to draw on their savings,” he says.

But are their savings enough to last a lifetime?

Shawn and Sharon are currently spending about $76,000 a year once debt repayment and savings are subtracted. They would like to raise this to $90,000 a year when they retire to allow for additional travel in the first 10 years.

“Based on these assumptions, Shawn and Sharon will not be able to achieve their goal,” Mr. Ardrey says. They will fall short in their later years, when Shawn is about age 85. They would still have their house, which they could sell, but “I much prefer to leave the home intact as a financial cushion to cover unexpected expenses,” the planner says.

They could alter their plans, working longer, saving more and spending less in retirement. Or they could take steps to improve their investment returns after fees. Leaving their goals intact, Mr. Ardrey looks at how they might fare if they sought professional investment management for their entire portfolio, their personal savings and their combined work pension money.

As it is, their RRSPs are 75 per cent in stocks, which is high, given how close they are to retiring, he says. Instead, the planner suggests they add some alternative income investments to their portfolio, something they can do by hiring an investment counsellor (portfolio manager) with expertise in the area. Alternative income funds include such strategies as private debt, accounts receivable factoring and global real estate.

Doing so should boost their investment returns to about 6.5 per cent, or 5 per cent a year after subtracting investment costs of 1.5 percentage points. “In Shawn and Sharon’s case, the value [in alternative investments] is not only the increased return, but also the reduction in equity exposure, reducing the overall portfolio volatility.”

This compares with historical returns of 4.25 per cent before fees of 0.5 per cent on their DC pension money and 4.55 per cent before fees of 2.2 per cent on their personal savings. “After inflation of 2 per cent, there is very little real return in their personal strategy,” the planner says.

The effect of a 5-per-cent net return on their retirement plan would be dramatic, Mr. Ardrey says. “Instead of falling short of their goal and running out of money when Shawn is 85 they would have more than enough to meet their lifestyle needs.” They would even be able to increase their spending by $9,000 a year if they chose to.

Client situation

The people: Shawn, 59, and Sharon, 56

The problem: Can they afford to retire early and travel without running out of savings?

The plan: Either adjust the goals or take steps to improve their investment returns after fees by hiring a professional money manager.

The payoff: With higher returns, they could well meet their original goals.

Monthly net income: $10,800

Assets: Cash $5,000; his TFSA $10,000; his RRSP $90,000; her RRSP $25,000; his DC pension plan $420,000; estimated present value of his DB pension plan $435,755; her DC pension plan $585,000; residence $450,000. Total: $2-million

Monthly outlays: Mortgage $1,980; property tax $330; home insurance $125; utilities $305; car lease $650; insurance, fuel $350; grocery store $700; clothing $100; line of credit $500; gifts, charitable $245; vacation, travel $800; dining, drinks, entertainment $1,450; personal care $350; pets $350; other personal $60; health, life, disability insurance $185; phones $160; TV, internet $150; TFSAs $400. Total: $9,190. Surplus of $1,610 goes to student loan and travel spending.

Liabilities: Mortgage $126,000; line of credit $10,000. Total: $136,000

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

Q4 TriDelta Investment Review – Out with the old and in with the new

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Overview

Out with the old and in with the new
Q4 and in particular December, was a period to forget from an investment perspective.

An example of the damage includes the following quarterly returns in their home currency:

S&P 500 (US) -14.6%
TSX (Canada) -11.1%
Euro Stoxx 50 -11.7%
China Stocks -12.1%
Japan Stocks -16.4%
Oil Prices -40.0%
CDN Preferred Shares -11.6%

Fortunately, TriDelta clients were cushioned somewhat from the damage by three main factors:

  1. A diversified portfolio that is not close to 100% in stocks.
  2. Exposure to our select group of Alternative Investments that were mostly up in the range of 1% to 2.5% on the quarter.
  3. The Canadian dollar decline helped to boost the return of foreign investments.

Most TriDelta clients ended the quarter down in the range of 3% to 5% depending on their exposure to stocks and overall asset mix.

What do we see in 2019 and why

As mentioned last quarter, the recent pullback has been caused by:

  • Rising interest rates – which lead to higher borrowing costs for companies, and higher returns on lower risk investment alternatives like GICs (although they remain low historically)
  • U.S.-China Trade Wars (and broader trade conflicts globally)
  • Fears of higher inflation
  • Declining earnings growth in the U.S. following the one time benefit of a new lower tax policy.

We are now fairly positive on stocks for the short term – and the rationale goes back to the four points above.

  1. We see interest rates in a stable range in 2019 with few if any rate hikes. While this is somewhat a comment on the general economy, we believe that stock markets will mostly react positively to news of slow to no rate hikes.
  2. While the U.S.- China Trade war is the hardest to predict for a variety of reasons, we do believe that there is a good chance of a “deal” taking place in the next few months and the stock market reacting positively on a global basis. The Chinese stock market fell 24% in 2018. U.S. markets were negative. Both countries are looking for a way to show investment growth in 2019 and the one area they can control is the negotiations and substantive agreements.
  3. As Oil prices fell 40% in the quarter, this has had a meaningful impact on inflation. Central banks in Canada and the U.S. like to keep inflation in the 2% range. Canadian inflation dropped to 1.7% in November, and U.S. inflation rate was at 2.2%. These rates ease some fears of higher inflation.
  4. The 20 year average of stock market valuations in the U.S. as measured by price/earnings, is 15.8. On December 31st it stood at 14.4 times earnings, almost 10% below its average. The TSX has a forward price earnings ratio of only 13 times earnings, compared to its 10 year average of closer to 15 times earnings. For the first time in several years, stock markets are ‘undervalued’ with Europe, Japan and Emerging Markets trading at even lower multiples.

The last reason that we are more positive about stocks is captured in the chart below. The chart looks at the S&P500 since 1940, focused on the seven worst quarters it has experienced. It then looks at the market performance in the one year, three year and five year periods after that terrible quarter.

Most investors would have been happy with the one year return in six of those seven scenarios, and happy with seven of seven scenarios for three year and five year returns.

Essentially, the stock market tends to go up in the long term. When it has a particularly bad period, it tends to bounce back, based in part on simply catching up to fair value.

Our positive outlook is not blind to some of the prevailing risks, which include:

  • higher U.S. borrowing costs
  • increasingly high debt levels (both government and consumer)
  • political gridlock
  • unwinding of previous stimulus

Nevertheless, we are looking to see decent stock market growth in 2019.

Our fearless predictions for 2019:
  1. Better than average stock market returns in most major markets including Canada and the U.S., barring a breakdown on global trade.
  2. Interest rates being mostly flat with maybe one ¼% increase in both Canada and the U.S with a real possibility of an interest rate decline in Canada before the year is out.
  3. The Canadian dollar being fairly flat vs. USD, but being tied more to oil than we have seen in the recent past.
  4. Oil prices rising, but only slowly.
  5. Preferred Shares having a strong year, bouncing back from their late year steep declines.
  6. Marijuana stocks will see a general decline overall as high valuations and uncertain revenues work their way through, but with increasing gaps between the winners and losers. In fact, we expect to see several bankruptcies in 2019 among the weak players in the market, and at least one major blow up of a more established firm (we just don’t know which one).
  7. Corporate bonds outperforming Government bonds.

Based on these short term beliefs, we have reduced our cash weightings in our stock funds down to essentially fully invested in both our Pension and Growth funds.

In the Growth fund, which is more active in terms of adjusting industries, we will be adding to Energy and Industrials, while reducing Telecoms and Utilities.

In the Fixed Income world we are looking to add some High Yield Debt and Preferred Shares to the fund.

How Did TriDelta do in 2018?

Overall, most clients had returns in the 0% to -5% range on the year depending on their individual asset mix. Given the major stock market declines, most of our clients did much better than the average Canadian investor for the year.

Our 2018 returns were as follows:

TriDelta Pension Pool (Stocks) -2.2%
TriDelta Growth Pool (Stocks) -8.1%
TriDelta Fixed Income Pool -2.2%
TriDelta High Income Balanced Pool -1.9%
Most Alternative Investments +5.2% to +10.5%
Other news and items of interest
  1. The 2019 Edition of our TriDelta Retirement Income Guide has just been released. It contains a wide range of tips and information on the different sources of retirement income, and how best to draw that income. Ask a TriDelta Wealth Advisor for a copy.
  2. A reminder that now is a great time to top up TFSA’s. They have added $6,000 per person to contribution room in 2019. If you have the funds, January is also a good time to do 2019 contributions to RRSPs, RESPs and RDSPs, as appropriate, as it will help you to have tax sheltering for a full year.
  3. U.S. consumer debt payments as a percentage of disposable income were 9.9% in 2018. That is the lowest rate in over 30 years.
  4. For a 65 year old couple (male and female), there is a 22% chance that a male will reach age 90, a 33% chance that a female will live to age 90, and a 48% chance that at least one person in the couple will live to at least age 90, so investors need to plan for the long term.
  5. According to studies by the U.S. research firm Dalbar, in the 20 year period from 1998 to 2017, the S&P 500 averaged a 7.2% annual return, the U.S. bond market averaged a 5.0% return, yet the average U.S. investor only averaged a 2.6% annualized return. The reason for this underperformance is primarily attributable to too much trading and shifting of portfolios, particularly moving away from risk after stock markets have declined, and too heavily to stocks when markets are peaking.
Summary

As long term investors know, down markets eventually recover and great markets don’t last forever. Right now we believe that we are in the ‘down markets recover’ stage and are acting accordingly.

In the very short term, anything can happen (all it takes is one Tweet). Having said that, most stock markets historically go up 7 years out of 10, and are more likely to go up in the year after having declined. Even for our older clients, there is usually lots of time to recover. There is an old adage that says “Investing is about time in the market, not market timing.”

At TriDelta we will continue to be nimble while focusing on the long-term plan. This would include a steady and diversified asset mix that is built appropriately for the goals of each client, and an eye on tax minimization.

Here is to a better investment year in 2019.

 

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

A proven path to higher and stable returns

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The global equity markets have been very volatile and have understandably rattled investors confidence. The ‘winds of change’ to one of the longest bull markets have arrived and our portfolio safety metrics are being tested.

At TriDelta we set out to construct conservative portfolios designed to deliver in all market cycles for financial peace of mind.

Investors understandably remain nervous as year end approaches and we expect more volatility as concerns over the China trade deal, elevated market valuations and Brexit uncertainty. Other concerns include the inverted yield curve and rising interest rates that may stall any ‘Santa Claus’ rally this year.

At TriDelta Financial we come well prepared and deliver highly diversified portfolios that typically include a significant allocation to Alternative Investments that include global real estate and private debt.

Alternative investments are essentially any asset that is not a public stock, bond or cash security. Alternative investments often provide higher returns than traditional assets by focusing on less efficient or private asset classes, such as infrastructure and private equity.

They can generate stable, high levels of income by investing in private income oriented investments, such as real estate and private debt. Hedge Funds, such as Market Neutral Hedge Funds can also reduce volatility by using sophisticated hedging strategies.

We have long held the view that traditional equity and bond investment portfolios simply do not deliver consistent wealth accumulation. Portfolios require more diversification to ensure uncorrelated, multi-factor protection against downside risk. We manage our clients wealth in the same way pension funds do by strategically building portfolios that include a number of investment types and strategies.

We use stocks, bonds and preferred shares, but also include Alternative Investments such as global real estate, private debt solutions and hedge funds. Alternative investments compliment and add real value to portfolios by:

  • Provide high income
  • Diversification to reduce risk
  • Lowers portfolio volatility
  • Enhances returns
  • Protects capital during market weakness

The major pension portfolios are constructed in a very similar way. Here is an Extract from the CPP Investment Board 2018 Annual Report on how they diversify and reduce portfolio risk:

Diversifying sources of return and risk – the Strategic Portfolio

As noted, we manage the Investment Portfolio to closely match its total absolute risk with that of the Reference Portfolio. But that does not mean that we simply hold 85% of the Fund in equities, or even in equity-like exposures. This would be imprudent, as the portfolio’s downside risk would be almost completely dominated by a single risk factor – that of the global public equity markets.

We can, however, build a portfolio with a superior return profile for a similar amount of risk by blending a variety of investments and strategies that fit CPPIB’s comparative advantages. Each of these strategies offers an attractive return-risk tradeoff of its own, and their addition clearly reduces the dependence on public equity markets.

First, we can invest in a higher proportion of bonds and add two major asset classes with stable and growing income: core real estate and infrastructure. By themselves, these lower the risk of the overall portfolio. This risk saving then allows us to add a wide variety of higher return-risk strategies, such as:

  • Replacing publicly traded companies with privately held ones;
  • Substituting some government bonds with higher-yielding credits in public and private debt;
  • Judiciously using leverage in our real estate and infrastructure investments, along with increased investment in development projects;
  • Increasing participation in selected emerging markets; and
  • Making significant use of “pure alpha” investment strategies, which rely on the skills and experience of our managers.

CPP Investment Board 2018 Annual Report

To help put the current market turmoil into perspective, here are a few opinions from the large US investment firms:

JPMorgan Chase see the pessimism in equity and high-yield bond markets as overdone, as it sees only a 20% to 30% chance of a recession in 2019, with an increased probability in 2020.

The bank’s strategists, led by John Normand, analyzed equity valuations and credit spreads for high-yield bonds in the period leading up to past economic recessions.

The team continues to favor stocks over corporate bonds in developed markets and takes a neutral view on emerging markets.

“It is right to anchor portfolio strategy in a late-cycle framework that anticipates below-average returns into and through the next recession, but we note it is also excessively pessimistic to price so much downside now as equity and HG credit markets are doing,” the analysts wrote.

Goldman Sachs generally believes the bull market will continue in 2019, but it could get choppier as the year continues and investors begin to worry about a recession in 2020.

Here are some of the investment bank’s predictions for next year:
The S&P 500 will rise 5 percent to 3,000 by year-end 2019 (after closing 2018 at 2,850).
Investors should raise cash.
Investors should be defensive.
The market could be in for big trouble from tariffs.

Bank of America ML believes that “the long bull market cycle of excess stock and bond returns is expected to finally wind down next year, but not before one last hurrah.

Their Research team forecasts 2019 to deliver:
Modest gains in equities.
A weaker US dollar.
Emerging markets are cheap and under owned, they could be a big winner in 2019.
Higher levels of volatility.
A notable slowing in global earnings growth.

Morgan Stanley believes US stocks will underperform and Emerging Market stocks will outperform.

They see a number of macro changes as a result of slowing global growth in US and developed markets, rising rates, higher inflation and tighter policy. They believe these shifts will result in reversals of some key market sectors as follows:
US dollar strength will weaken once the Federal Reserve pauses on rate hikes.
US stocks outperformance will change to underperform.
US and European rates will converge.
Emerging markets have underperformed, but will retake the lead and outperform once China easing starts working.
Value portfolios will start outperforming growth.
Emerging market sovereigns will start outperforming US high yield bonds.

The TriDelta Approach:

TriDelta’s Alternative Assets Investment Committee focuses on putting the odds in our clients’ favour by focusing on:

  • Proven managers with strong track records and disciplined investment philosophies
  • Earning more stable returns
  • Generating premium yield in less liquid investments
  • Solutions that lower clients’ portfolio volatility

It is often difficult for investors to access these investments for three reasons:

  1. Alternative Investments are often restricted only to Accredited Investors (those with family income of $300,000+ or an investment portfolio of $1 million+)
  2. Many large Canadian financial firms simply do not make them available to their clients because alternative investments are often more complex and require a specialized skill set to analyze, review and select managers; and
  3. Many of the best alternative managers provide only restricted or limited access to their funds.

At TriDelta Investment Counsel, we solve all of these problems.

As an investment counsellor, we are able to offer these investments to all clients on a discretionary account basis. Alternative investments are a key element of our overall investment strategy.

Anton Tucker
Written By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448
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