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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

Meditation

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I have always been fascinated by the practice of meditation, yet somehow never really adopted the discipline. Not because of time limitations or anything other than not knowing how best to learn the basics and get involved.

I spent some time reading on the subject and for those interested here are a few starting points for the novice, like me:

It seems that a basic framework is necessary or at least very helpful to start the journey of meditation discovery. Meditation means to think, contemplate, devise and ponder, mindfulness. The meditation practice of ‘mindfulness’ and ‘refuge’ are done to support and enable a meaningful life.

What is Mindfulness?

It is the basic human ability to be fully present, aware of where we are and what we’re doing, and not overly reactive or overwhelmed by what’s going on around us.

A Few Things to Know About Mindfulness:

  1. Mindfulness is not obscure or exotic. It’s familiar to us because it’s what we already do, how we already are. It takes many shapes and goes by many names.
  2. Mindfulness is not a special added thing we do. We already have the capacity to be present, and it doesn’t require us to change who we are. But we can cultivate these innate qualities with simple practices that are scientifically demonstrated to benefit ourselves, our loved ones, our friends and neighbors, the people we work with, and the institutions and organizations we take part in
  3. You don’t need to change. Solutions that ask us to change who we are or become something we’re not have failed us over and over again. Mindfulness recognizes and cultivates the best of who we are as human beings.
  4. Mindfulness has the potential to become a transformative social phenomenon. Here’s why:
    • Anyone can do it. Mindfulness practice cultivates universal human qualities and does not require anyone to change their beliefs. Everyone can benefit and it’s easy to learn.
    • It’s a way of living. Mindfulness is more than just a practice. It brings awareness and caring into everything we do—and it cuts down needless stress. Even a little makes our lives better.
    • It’s evidence-based. We don’t have to take mindfulness on faith. Both science and experience demonstrate its positive benefits for our health, happiness, work, and relationships.
    • It sparks innovation. As we deal with our world’s increasing complexity and uncertainty, mindfulness can lead us to effective, resilient, low-cost responses to seemingly intransigent problems.

-Mindful.org

What is Refuge?

‘Refuge’ means many things including safety, peace, presence, protection, deep relaxation, trust and much more.

The meaning of Refuge becomes deeper and deeper as one proceeds along the Buddhist path and its real depth and magnitude is only known at enlightenment. To put it very simply, to take Refuge is to turn decisively towards the most powerful, sublime, true and meaningful force in the entire universe, seeking its strength, protection and guidance. These will be necessary in order to successfully rid one's mind of confusion and suffering and to attain the peace, wisdom and qualites of enlightenment. This process - of connecting profoundly with the absolute - begins formally with the ceremony of 'Taking Refuge' and is thereafter developed through study and meditation to become a deep inner strength. It is also a commitment to the Buddhist path.

By taking the Refuge ceremony, one becomes a Buddhist. From then on, the inner confidence and support that comes from taking Refuge daily forms a psychological basis for all the work of self-knowledge and transformation of the Buddhist 'path of peace'. Like the foundation of a house, Refuge is the basis upon which all other Buddhist practice is built.

Here are two introductory videos that may get you on the meditation path:

I have included meditation on my 2019 to do list. I encourage you to join me.

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

Investing like the pros

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The traditional so-called 60-40 asset allocation model, has 60% invested in stocks and 40% in government or other high-quality bonds. But after a decade or more of out-of-the-ordinary market conditions, many investment professionals are tweaking the model or abandoning it altogether.

The historical 60/40 investment management approach performed reasonably well throughout the 80’s and 90’s, but a series of bear markets that started in 2000 coupled with a three decade period of declining interest rates have eroded the popularity of this approach to investing.

Bob Rice, the Chief Investment Strategist for Tangent Capital, spoke at the fifth annual Investment News conference for alternative investments and predicted that a 60/40 portfolio was only projected to grow by a mere 2.2% per year in the future and that those who wished to become adequately diversified will need to explore other alternatives such as private equity, venture capital, hedge funds, timber, collectibles and precious metals.

“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore,” he said. “It was convenient, it was easy, and it’s over. We don’t trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”

At TriDelta we put together a brochure that summarizes alternative investments titled, Alternative Investments, A proven path to higher and stable returns (Click to download).

A case in point is the continued success of Yale Universities USD27 billion endowment plan. They recently published an update that confirms excellent performance, a return of 11.3% ending June 2017 as a result of a highly diversified portfolio that significantly limited exposure to bonds of only 7.5% and equities to 19.5% (4% domestic US and 15.5% global, ex US). The rest comprised real estate, absolute return, venture capital, leveraged buyouts and natural resources – these are so called ‘alternative investments.’

Yale University as a prime example of how traditional stocks and bonds were no longer adequate to produce material growth with manageable risk.

Alex Shahidi, JD, CIMA, CFA, CFP, CLU, ChFC, adjunct professor at California Lutheran University and managing director of investments, institutional consultant with Merrill Lynch & Co. in Century City, California published a paper for the IMCA Investment and Wealth Management magazine a few years ago. This paper outlined the shortcomings of the 60/40 mix and how it has not historically performed well in certain economic environments. He states that this mix is almost exactly as risky as a portfolio composed entirely of equities, using historical return data going back to 1926.

At TriDelta Financial we recognize the short-comings of a portfolio limited to the old traditional 60/40 stock, bond model and as a result have embraced alternative solutions as an integral part of our investment management platform.

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

The importance of a Will

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A Will is something that most of us should have unless our net worth is limited and we’re happy with the way the government mandates distribution between spouses, children and grandchildren (detailed below).

Any special inheritance wish will however need to be properly spelled out in a legal document, which takes effect when you die.  Without a valid Will with detailed instructions, the result is often contentious with family members feeling that the deceased would have wished things to be different.  This results in more grief and often family in-fighting.

For most of us a Will is a vital part of your financial plan that must be updated throughout our lifetime.

Canadian Will surveys over the past decade reveal remarkably similar statistics showing that approximately 55% of Canadians have a written Will. This is encouraging although still leaves many without clear direction of how to handle the distribution of assets.

Another key point is how old the Will is and whether it is still applicable to one’s evolving life situation and distribution wishes. A recent survey by Legal Wills suggests that about 12% of Wills are out-of-date, which bumps the number of people needing Wills (either new or amended) to well over half of Canadian adults.

So what do we need to do? First off, let’s understand the basics:

  • Estate planning involves the transfer of someone’s assets (e.g. property, money) when they die, as well as a variety of other personal matters. Wills, estates, trusts and power of attorney are all common tools used in estate planning.
  • A person’s will is a written document that sets out the person’s wishes about how his or her estate should be taken care of and distributed after death. It takes effect when the person dies.
  • An estate is the property that a person owns or has a legal interest in. The term is often used to describe the assets and liabilities left by a person after death.
  • A trust is created to hold property or assets for the benefit of a particular person called the beneficiary. It is managed by a person called a trustee, who has an obligation to deal with the property for the beneficiary of the trust.

The bottom quintile of Canadians net worth tops out at $206,765 (Environics Canada), which means that in the event of death for couples without a will, the spouse essentially inherit all the assets, which may not be the deceased’s wish.

This is how it works when a person dies without a valid will, called “intestate”, Ontario’s Succession Law Reform Act sets out how the estate is distributed.

  • According to the Act, unless someone who is financially dependent on the deceased person makes a claim, the first $200,000 is given to the deceased person’s spouse if he or she has decided to claim his/her entitlement. The other possibility is to claim half of the net family property. A lawyer can help determine which is the better choice.
  • Anything over $200,000 is shared between the spouse and the descendants (e.g. children, grandchildren) according to specific rules.
  • If there is no spouse, the deceased person’s children will inherit the estate. If any of them have died, that child’s descendants (e.g. the deceased person’s grandchildren) will inherit their share.
  • If there is no spouse or children or grandchildren, the deceased person’s parents inherit the estate equally.
  • If there are no surviving parents, the deceased person’s brothers and sisters inherit the estate. If any of the brothers and sisters have died, their children (the deceased person’s nieces and nephews) inherit their share.
  • If there are no surviving brothers and sisters, the deceased person’s nieces and nephews inherit the estate equally. However if a niece or nephew has died, their share does not pass to their children.
  • When only more distant relatives survive (e.g. cousins, great nieces or nephews, great aunts and uncles), the rules are complex and you should speak to a lawyer.
  • If any heir was alive when his or her relative died, but died before the estate was distributed, that person’s own heirs are entitled to their share.
  • When a person dies without a will, only blood relatives, including children born outside of marriage, or legally adopted children can inherit. Half-blood relatives share equally with whole-blood relatives.

Going to a lawyer rather than drawing up your own will significantly reduces the risk that assets will not go to those you had hoped to benefit. This is especially important in today’s world in which we see more common-law relationships, blended families, and second or third marriages.

Some people simply opt for inexpensive ‘Will kits’ that may prove problematic particularly given the many blank spaces in these kits and how easy it is to make a mistake, which typically wouldn’t come to light until after you had died.

There are now also a number of online versions that serve many Canadians needs at a fraction of the cost, which may be suitable for your situation, but be sure to research your options and take the time to review the competitive offerings applicable to your province.

An advantage of these online services is that updating your will can be easily achieved, but the main attraction is the lower cost than a lawyer.

Our opinion is to be sure of all the angles and take advantage of our legal experts to discuss your needs and ensure that your Will is applicable for your needs despite a price premium. The financial peace of mind this delivers will be well worth the cost.

Regardless of the method you choose what’s important is to get your wishes properly documented and procrastinate no further.

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

Major changes to the Ontario Disability Support program

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The Ontario disability support program (ODSP), the income benefit for adult Ontarians with a disability, aged 18 years to 65, was introduced in 1998. The ODSP benefit replaced the old Family Benefits Allowance (FBA) which had been in place for a number of years, however on September 1 2017 the ODSP will undergo a number of major changes. These are the first major changes to the program since it was introduced 19 years ago.

Over the past 19 years the income benefit has been increased in increments of between 2% and 1% to the current maximum monthly benefit of $1,128 for a single person living on their own. On the other hand the changes in the asset limits and cash gifts for people who receive ODSP have changed little, that will change on September 1 2017. The changes will help to enhance the lives of the more 400,000 Ontarians who receive support through the ODSP plan.

The Ontario Disability Support Program (ODSP) increased the exemption limits on compensation awards for loss or injury in order to allow individuals to benefit more from these awards without reducing their income support. Compensation awards for pain and suffering have been increased from $100,000 and are now fully exempt as income and assets for individuals receiving Ontario Disability Support Program (ODSP). People with disabilities are now able to use their compensation for day-to-day living expenses or to reduce any debt, not just for pre-approved disability-related costs. This change was effective as of August 1st 2017.

The Changes to ODSP

These changes are part of a larger set of social assistance improvements that will be effective on September 1st, which include:

  • An increase in the monthly maximum deduction for disability-related employment expenses under ODSP from $300 to $1,000.
  • Changes to health benefits available under the Transitional Health Benefit to include batteries and repairs for mobility devices.
  • A full income exemption under ODSP of all donations received from a religious, charitable or benevolent organization for any purpose.
  • The basic cash exemption limit for a single person will be increased from $5,000 to $40,000
  • The basic cash exemption limit for a spouse included with the person will be increased from $7,500 to $50,000
  • Payments from a trust fund, or segregated fund: gifts and other voluntary payments will be increased from $6,000 for a 12 month period to $10,000
  • Gifts to purchase a principal residence will be exempt as income
  • Gifts to purchase a Primary motor vehicle will be exempt as income
  • Gifts to pay the 1st and last month’s rent will be exempt as income

The benefits of the Changes

These changes are welcomed, and people who receive ODSP no longer have to fear the loss of the monthly benefit if their bank account exceeds the $5,000 or $7.500 limit. Liquid asset limits of up to $40,000 or $50,000 will no longer be considered income in the month its received so they won’t lose their ODSP benefit that month. People on ODSP can even save a small amount from their employment income to buy a new coat, a new TV, furniture, a suit or dress, take a vacation or have a nice meal in a restaurant just like everyone else. They will no longer be forced to spend their small inheritance or hide the money from their case worker. They now have some breathing room to spare.

The New Regulations

The regulations have yet to be published so as they say, the devil is in the details. We expect to see the regulations published by September 1st. There are still many unanswered questions, can an individual who receives ODSP own a life insurance policy or segregated fund policy on their own lives with cash values of up to $100,000 without losing their disability benefits?.

Living on ODSP

Living on the ODSP monthly benefit is still not living in the lap of luxury. The rising cost of living makes it impossible to meet basic needs and people suffer as a result. Finding an apartment is next to unattainable on the current ODSP. Still parents will welcome the new changes because their hands will no longer be tied to an impossibly delicate $5,000 asset limit.

Case study vs the new asset limits  

A dentist, who has a daughter with a disability, employs her in his office. He pays her the minimum income allowed within the ODSP guidelines but his daughter is unable to save anything beyond the $5,000 liquid asset limit. Now with these new asset limits he can increase her salary and she can save money in her bank account to purchase those little extra’s, or buy her own clothes, and things that make her life just the same as other children who have part time jobs. She will no longer have to live within the confines of a $5,000 limit.

Case study vs a gift over the asset limit

Some time ago woman called me in despair, she was upset and crying. She told me her preauthorized rent payment had bounced because her ODSP office discovered she had received a $20,000 advance on her mother’s inheritance and her ODSP benefit had been cut off without notice. The estate trustee had given her the advance to buy a car because she lives in the country and she needs a car for shopping and doctor’s appointments in Toronto and other necessary trips. We began preparing her appeal to the Social Benefit Tribunal (SBT). She only had 30 days to prepare her case and submit her appeal to the SBT. However after September 1st this person will not lose her ODSP benefit and her rent payment won’t bounce because the asset limit has been increased to $40,000.

A case study vs a structured settlement

For people who receive structured settlements the unlimited awards will go a long way to assisting them with the lifestyle, for which the courts granted the settlement, to only to have the ODSP office take their benefit away. In most cases a structured settlement can take years to settle. In one case it took three years to settle the law suit. During that time the individual applied for and received a total ODSP income of approx. $40,000. In addition he also received  a lump sum payment of $63,000 in back payments from Canada Pension Plan Disability Benefits (CPPD). He had to repay ODSP the $40,000 he received over the three years, because he had an over payment. However through some creative planning we managed to dispose of the settlement and retain all but $125,000 which was paid to his mother for his personal costs and expenses. However when the new structured settlement regulations are in place he will only have to repay ODSP $25,000, and he can keep all of the structured settlement. He can use the funds in the settlement for what the courts intended, to maintain his lifestyle. 

Compiled in conjunction with John Dawson by:

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

Our housing market – is this the top?

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The explosive growth of the Canadian housing market in the last decade may finally be coming to an end.

Interestingly there is good logic on both sides of the debate and it is anyone’s guess where markets go in the short term:

The reasons for it to continue growing:

  • Foreign buyers remain very active despite a slowdown in Vancouver due to the new 15% BC foreign buyers tax. This has however likely boosted Toronto sales.
  • Three decades of low interest rates.
  • Job growth in the major centres outpaces the national average, particularly Toronto and Vancouver, which collectively accounted for all of Canada’s increases in 2016
  • Demographics reflect that there are more people aged 25 to 40 in these two cities and they have grown faster relative to other age groups. This segment is also in their prime home buying and child producing years, further stimulating home sales.
  • The number of single detached homes built in Toronto in 2015 was the lowest since 1979 according to a BMO report. This imbalance in supply and demand is a big reason prices for single-family houses are experiencing double-digit price jumps. In May 2016 the average detached home price jumped 18.9%, while condos only saw a 5.9% increase.
  • Housing market speculators flipping properties are very much part of this process although hard data on this activity is sparse.
  • A continued weak Canadian dollar is stimulative to the housing market. Since 2011, the Loonie has lost 27% of its value against the greenback, while Canadian homes appreciated by 26%.
  • If houses were priced in U.S. dollars, a very different perspective emerges. Canadian home prices aren’t appreciating, but show a decline of about 9% against the average benchmark price. The same trend is evident when pricing Canadian homes in Chinese yuan. This is worrisome because Canadians are actually being devalued on a global scale.

Among reasons for the long boom to end:

  • Steven Poloz, head of the Bank of Canada says the Canadian housing boom is unsustainable for a number of reasons including overall household financial stresses and climbing debt.
  • The anticipated interest rate trend, changing from the past three decade decline to a rising rate environment, appears to have already started in the U.S.
  • Continued weakness in the price of oil as is anticipated by many given slow global growth and excess oil supply.
  • Asset prices inevitably revert to their historical mean, which is overdue in Canadian housing prices.
  • Buyers believing the real estate market is different this time.  Canada’s housing market dropped about 15% in 1957 over six years and a whopping 25% in the early ‘90’s so maybe this market needs to digest some of the recent gains, which are more than double our long-term averages.

The correction may already have begun. Consider that the Teranet-National Bank index of house prices in Canada’s 11 largest metropolitan regions rose 6.1% in November, yet only four cities—Toronto, Hamilton, Vancouver and Victoria actually posted gains. Values in the other seven cities contracted, suggesting that a correction is well underway.

Here are two recent articles that provide more food for thought on our real estate market:

The first article from Maclean’s suggests that population growth isn’t driving Toronto house prices as many have claimed.

The second article from MoneySense magazine, takes a broader approach and provides the Canadian Real Estate Associations (CREA) perspective.

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