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Canadian investors have toughened up, and more lessons my clients have taught me during this crisis

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Over the past few weeks I have been having some interesting conversations with clients.

While the conversations usually include discussions about investments, we often spend more time discussing family, health, today’s challenges and tomorrow’s hopes. If it ever wasn’t clear before, it is very clear now that our investments are here to serve a broader purpose — which is to allow us to live as full a life as we can.

As I talk to more clients I will no doubt be learning more from each of them.

Here are my big five takeaways to date:

From a Canadian perspective — COVID-19 truly is unique

Turbulent global markets due to covid-19 In a recent chat with a 99-year-old client who was born in Canada, I asked him if he had ever seen anything like what we are experiencing today. I was surprised when he said “Never in my life.” He did say that things were clearly difficult during the Second World War, but we were never so totally shut down like we are today.

His comment was definitely a jolt to me. This is historic. It is obviously not business as usual. We need to treat it very seriously from a health and investment perspective.

From a non-Canadian perspective — COVID-19 brings back other memories

Another client in his 50s related a story from his childhood, growing up in a war-torn nation. He remembered staying at home, being warned about going outside. He said that he could now better relate to his father’s worries about supporting the family when almost everything was under siege and there was no work to be had.

COVID-19 is clearly bringing memories of war and sacrifice. It is a reminder that life can be hard, unfair and unyielding. The fact that this brings comparisons to terrible times of war is a reminder of how significantly strange times have become.

The Financial Crisis of 2008/2009 has created a tougher investor

During the Financial Crisis, there was fear that big banks would collapse. There was a worry that stocks would drop 90 per cent before it was over. Few if any investors had lived through such a broad and deep investment crash. At the time, there were a meaningful number of clients who had to be convinced not to sell out their portfolios with large losses.

Yet, they ultimately saw how markets eventually recovered and thrived.

Today, most investors lived through 2008 and 2009. Their reactions to COVID-19 related declines have been much calmer. This isn’t to say that everyone feels that way, but a much higher percentage recognize that this pandemic will end, whether in a couple of months or a year. Likely, before it ends, stock markets will make a sizeable comeback.

There remains an overconfidence that people can time the bottom of the market

Some clients have expressed frustration over missing the great investment opportunity of 2009. They have said that they want to take advantage of this new great opportunity. I am with them. They are absolutely correct. The problem is when is exactly the right time to jump in?

The reality is that these markets move extremely fast. As we saw from March 18 to 26, some beaten down stocks jumped 50 per cent or more. However, in order to have achieved all of those returns, you would need to have bought in not just on the right day, but the right hour. To have purchased in that right hour, you would have needed the guts to buy when markets were in free fall. It is possible, but you need to be significantly lucky and have the willingness to go where almost nobody else is going.

On the flip side, many people think that there is another meaningful drop ahead, so they will wait for that one before buying. They may be right, but if they are wrong, then they will have almost entirely missed the ‘once-in-a-decade’ buying opportunity.

If you really want to take advantage of weak markets you have to be willing to buy in at a certain price, accept that it will likely go lower in the short term before it recovers, and keep focused on a year from now. You won’t get it perfect, but you will get it mostly right.

Health, family, friends, investments — in that order

As I mentioned at the top of the article, COVID-19 is a big threat to everyone, but it is clearly a health threat above all else. There are definitely financial fears — and for some these are pressing. Yet, for most of our clients they understand that for now, their goal is to look after themselves and each other. If they do that, everything else will take care of itself.

Several clients have had a consistent message. Their comments sound something like this, ‘We are blessed to be in Canada. We are blessed to still have reasonably good health. We have food. We have shelter. We even have spring. We are thankful to have someone like you to help with our finances, and we are not worried. This too shall pass as long as we have patience and do the right things.’

As big and as bad as this situation has become, I thank my clients for bringing their life wisdom and perspective to this time. I know that they are right and this too shall pass.

Reproduced from the National Post newspaper article 3rd April 2020.

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

Markets are fearful and history tells us that means the time to buy is right now

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Knowing what to do in the middle of a highly stressful and uncertain time is very difficult for investors. You have experts on TV telling you to horde cash, while others say today is the best day to buy. They all believe what they are saying, and everyone is really left to guess.

At our firm there are two things that guide us at times like this:

1. Have the right asset mix for you, and stick with it. Market changes should not meaningfully change your asset mix. Your asset mix should change mostly when your personal situation changes. Things like retirement, major purchases, divorce, or significant health changes — all of these might be times for a change to your asset mix.

This work on the correct asset mix insulates those with the least tolerance for losses from some of the damage when things go bad. For those not so insulated, they are OK with it because they understand that this is the price to be paid to get the upside as well.

2. Use data to minimize emotional investing. Our Sr. VP, Equities, Cameron Winser reviewed similar pullbacks over the past 70 years. Since 1950 there have been eight periods on the U.S. S&P 500 when there has been a decline of at least 15% in a 30-day period. Picking the absolute bottom is a guess each time, but at the end of that 30-day period of declines, the immediate and mid-term future was almost always positive.

These are returns without dividends, so they underestimate the actual returns.

Even without dividends, we can see the following:

  • Next 20 trading days (roughly 1 month) — the average return was 9.0 per cent and 7 of 8 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 12.3 per cent and 8 of 8 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 10.6 per cent and 7 of 8 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 28.7 per cent and 7 of 8 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 50.1 per cent and 8 of 8 were positive.

We looked at the same scenario for Toronto stock markets. We found nine situations of 15+ per cent declines in a 30-day period. The findings were largely the same.

  • Next 20 trading days (roughly 1 month) — the average return was 6.7 per cent and 8 of 9 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 8.0 per cent and 8 of 9 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 8.5 per cent and 6 of 9 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 21.8 per cent and 8 of 9 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 47.9 per cent and 9 of 9 were positive.

Fearful markets are a buying opportunityThis data tells a very important and clear story. Big pullbacks represent good entry points. As I write this, the S&P 500 has crossed the 15 per cent line from peak to trough this month.

This tells us that based on a pretty long history, if you buy into the market after a 15 per cent drop, you may suffer further declines over the next few days, but as you look further out, you will very likely be pleased with the timing of your purchase. It also tells us that if you are fully invested in stocks at a reasonable weighting for you, then now is definitely not the time to be selling.

People will say on each of these events “this time is different.” They are right. Each time the cause of the decline is different, but the constant is human emotion. Fear and greed. Human emotion is the same and it leads the markets to repeat patterns again and again.

The lesson of this fear and greed is that now is likely a good time to be invested in stocks. It may not be the perfect day, but it is very likely to be a good day, as long as your investment timeline is at least a year.

Other things to note is that of the list of 15+ per cent declines in the U.S., six of the eight had further declines of only zero per cent to five per cent after the 15 per cent point.

In October 1987, the decline was worse, but most of it happened on one day. On Oct. 19, Black Monday, the Dow fell 22.6 per cent. In this case, our theory still holds true, in that once that day was done, even though markets were very volatile over the coming weeks, the trend was clearly positive.

The other time with a larger decline was in October 2008. While many of us remember that it wasn’t until March 2009 that things actually bottomed out, let’s say you bought into the market in October 2008 after a 15 per cent decline. You would have had a pretty rough ride for several months, but you still would have been comfortably ahead by October 2009.

The 2008 example also leads to an important lesson at times like this. Patience is a key for investment success. We are currently in a very volatile market situation where every day is a roller coaster. This will likely continue for a few more days, maybe even weeks. It will not continue for months. Panic selling is not a long term activity. It feels like it when you are in the middle of the days or weeks that it goes on, but it will not continue for long.

The other reaction from many people at this point is they say that they will reinvest cash once things settle down. To borrow from Ferris Bueller: “Markets move pretty fast.”

“Once things settle down,” usually means that the market has had a solid recovery. Over the ‘Next 20 Days,’ six of the eight periods saw significant one month gains. You can certainly wait until some meaningful gains have returned, but there is often a sizeable cost for waiting.

Our key message here is that based on long-term historical data that has seen how actual investors react after a 15 per cent decline, this is a time to be adding to or sticking with your stock investments, and not a time to be selling out. Guarantees do not exist, but data, human emotions and history guide us on what to do.

Reproduced from the National Post newspaper article 6th March 2020.

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

Are RRSPs really worth it? The answer may surprise you

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More and more people say to me that they don’t contribute to RRSPs. They don’t think it makes sense. If they ask my opinion, my response always depends on the specifics of the person who is asking. For the purposes of this article, I will address a few different scenarios.

For all of these examples, the key factors to consider are the following: In retirement, will the person likely be in a higher tax bracket than they are today, the same bracket, or a lower one? I call this the tax teeter-totter. Will their income likely be meaningfully higher or lower in the next five to ten years? How old are they? Are they married and, if so, how long will it likely be until both spouses have passed away?

Situation No. 1: Higher income, significant RRSP

This person has seen what happens when someone dies with a large RRSP or RRIF. When a single person (including widows and widowers) dies, their remaining RRSP or RRIF balance is fully taxable in the final year. For example, if their final balance is $500,000, nearly half of their account will disappear to taxes. Because of that concern, many people with a sizable RRSP and often high income decide that the RRSP isn’t a good use of their funds. To these people I say, “You are making a mistake.” If you are in a tax bracket where you can get at least a 45 per cent refund on an RRSP contribution, I say take the money today, get many years of tax-sheltered growth, and you can worry about a high tax rate on withdrawals at some point in the future. Depending on the province, this 45 per cent tax rate tends to be in place once your taxable income is above $150,000. While you could make a financial argument that it is possible to be worse off to do an (R)RSP contribution depending on what happens in the future in terms of taxes, given the certainty of tax savings at the front end, I would highly recommend making the contribution.

Situation No. 2: Lower income that could jump meaningfully in a few years, with TFSA room

RRSP Piggy BankIn Ontario, if your income is $35,000, your marginal tax rate is 20.1 per cent. If your income is $50,000, your marginal tax rate is 29.7 per cent. If you are making $35,000 today, but think you might be making $50,000+ in the next couple of years, it is better to put any savings into a TFSA now, and wait to do the RSP contribution until you are making $50,000. This is the situation for many people early in their careers. You will be making almost 10 per cent more guaranteed return (29.7 minus 20.1) by waiting, but will still have the same tax sheltering in the TFSA as you would in the RRSP. In general, if you think you will likely be in a much higher tax bracket in the near future, it is better to hold off RRSP contributions, and save up the room to use when you will get a much bigger refund. As a rule of thumb, I suggest people with a taxable income under $48,000 put any savings into a TFSA before putting it into an RRSP.

Situation No. 3: Income could fall meaningfully in a few years

This is the opposite situation and recommendation to No. 2. If you think that you will be in a much lower tax bracket in the near future (taking time off work for whatever reason), you may want to put money in the RRSP now, and actually take it out in a year when your income will otherwise be very low. Many people do not realize that you can take funds out of your regular RRSP at any time and at any age. While you will be taxed on these withdrawals as income, if the tax rate is very low because you have little other income, it usually makes sense to withdraw the money in those years and put it back when your income is much higher.

Situation No. 4: Couple in late 60s, not yet drawing from RRIF

Some people figure that there is no point to put money into an RRSP in their late 60s because they are just going to draw it out shortly anyways. It is true that one of the values of tax sheltering is the compounding benefit of time. Putting a dollar into an RRSP at age 30 will likely have more of an impact than at age 68. Having said that, often people forget that even if they start drawing funds out of a RRIF at 72 or earlier, they may very well still be drawing out funds 20 years later. There is still many years of tax sheltering benefit. The question goes back to the tax teeter-totter. If they are going to get a 25 per cent refund to put funds into their RRSP, but will be getting taxed at 30 per cent or more when they take it out, then it probably doesn’t make sense to contribute more to their RRSP. It all comes back to their likely income and tax rates once they start to draw funds down from their RRIF.

Situation No. 5: Husband is 72, wife is 58

The answer to the question of how to contribute to an RRSP for couples with a significant age difference depends on the taxable income of each person and the ability to most effectively split income over the next number of years. Larger age gaps can be quite valuable for RRSP investing. One reason is that if the younger spouse has a Spousal RSP, and the older spouse still has RSP room, the older spouse can contribute to the younger spouse’s Spousal RSP. This can be done by the older spouse, even if they are older than 71, as long as the younger spouse is below that age. In this example, if the 58-year-old isn’t working, she can actually draw income out from their Spousal RSP and claim the funds only as their income, even though the 72-year-old had benefitted from the tax advantages of contributing over the years. As a reminder, if the younger person had a large Spousal RSP and the older one had no RSP or RIF, they wouldn’t be forced to draw any income because the younger partner was not yet 71. The one area to be careful of is that for the income to be attributable to the 58 year old and not the 72-year-old, there can’t be any contributions to the Spousal RSP for three years. To take advantage of this scenario, maybe the older partner contributes for many years to the Spousal RSP, but stops three years before the younger spouse plans to draw the funds.

While the RSP is generally a positive wealth management tool for many Canadians, there is a time to contribute, there is a time not to contribute and there is a time to withdraw funds. Each situation may create opportunities to maximize your long-term wealth. Choose wisely.

Reproduced from the National Post newspaper article 19th February 2020.

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

These unfair tax policies are putting a burden on women and seniors and need to be changed now

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Here’s a scenario I’ve seen several times in my career as a wealth manager. A retired couple that receives two full CPP payments and two full Old Age Security (OAS) payments is able to fully split their income for tax purposes. Then one spouse dies. The survivor only receives one CPP payment, no OAS, and often has a higher tax rate on less family income because they now have one combined RRIF account that must withdraw more funds on a single tax return. It hardly seems fair, because it isn’t.

The scenario highlights just one of a number of thoroughly unjust tax policies that negatively affect hundreds of thousands of Canadians each year. Many of the policies are particularly harmful to older women because they hit those who are single/widowed and over the age of 65 — a group that contains a much higher percentage of women than men.

As we head into a new decade, and in the spirit of eternal optimism, I am providing a list of four main offending policies in the hope that some political titans vow to fix them.
Without further ado, here are the festering four:

1. Income splitting of a defined benefit pension, prior to age 65

THE SITUATION: If you receive a defined benefit pension at any age, you can split the income with your partner for tax purposes. However, if you convert some or all of your RRSP to a RRIF and withdraw money before age 65, you can’t split the income. You have to wait until age 65.

WHY IT MATTERS: Income splitting is another way of simply saying “pay less in taxes.” If you can income split you will most likely keep more of your pension money than if you can’t. As a simple example, if one person earns $120,000 in Ontario, their tax bill will be $32,895 (with no deductions). If instead, that person is able to fully split income and two people now show $60,000 in income, the total tax bill is $22,050. On the same amount of income, the tax bill is $10,845 lower.

WHO IT AFFECTS: Everyone who does not have a defined benefit pension. These days, most employees who have a defined benefit pension work for the government or a quasi-governmental organization. The private sector now has a very low percentage of employees in a defined benefit pension. To oversimplify, working for the government provides a sizable unfair tax advantage for those under 65 compared to those working in the private sector, without a defined benefit pension. It also benefits couples over singles.

HOW TO FIX IT: Apply the same income splitting age on RSP/RIF withdrawals as on defined benefit pension payments. If that is deemed too expensive for the government, do an income-splitting cap of something like $20,000, but apply it equally to all those of a specific age regardless of what type of retirement pension plan they have.

2. Couples tend to receive more dollars per person than singles in Old Age Security (OAS)

Older woman calculating her taxesTHE SITUATION: Current OAS is more than $7,300 per person per year. If you are collecting OAS starting at age 65, your income can be up to $79,000 before any of your OAS is clawed back. At an income of $128,000 it will be fully clawed back.

WHY IT MATTERS: This is significantly unfair to retired singles. If you are single and your income is $130,000, you will collect no OAS. If you are a couple with household income of $130,000, and you can fully split your income, you will collect about $14,700 of OAS every year indexed to inflation.

WHO IT AFFECTS: Single/widowed seniors get the short end of the stick, and they are more than twice as likely to be female. I have seen many cases where a couple receives two full OAS payments. When one passes away, the survivor suddenly receives $0 in OAS because all of the income (usually RIF income) now sticks to one person instead of being split. According to Statistics Canada roughly 70 per cent of those in long-term care and retirement residences are female. As far as private residences (houses, apartments, condos), 40.2 per cent of women aged 80 to 84 live alone, while only 18.6 per cent of men in the same age group live alone. However you slice it, it appears that at least twice as many single seniors are woman as opposed to men.

HOW TO FIX IT: Have the OAS clawback be based on a dual-person rate or a single-person rate, such that two-person families might see a little more clawback and single-person families see a little less. Given that the current clawback kicks in at $79,000 for one person, the two-person ‘family’ rate could be set at a little less than double that, say $145,000 (with full splitting, the current cutoff for two people is effectively $158,000). The new single-person clawback cutoff could then be raised to about $85,000. The idea is to massage the clawback criteria so that people are much less likely to go from double OAS payments to zero when one dies or gets divorced.

3. Effectively losing the CPP Survivor Pension

THE SITUATION: If two people in a couple are both collecting a full Canada Pension Plan benefit and one of them dies, the other will receive a one-time $2,500 death benefit, and then they will lose the entire CPP payment of the person who died. On the other hand, if the same couple has one person who is collecting a full Canada Pension Plan and their partner never paid into the plan and collects $0 of CPP, and either of them die, the net result is that they will continue to collect one full CPP amount. The reason is that no individual is able to collect more than 100 per cent of a CPP benefit. However, if one person is currently receiving less than 100 per cent, and let’s say her partner dies, that person is able to top up her CPP payment up to 100 per cent out of the amount that was being collected by her partner.

WHY THIS MATTERS: A full share of CPP in 2019 is over $13,800 a year. This is a significant amount of money. To go from receiving up to $27,600 a year and having it drop to $13,800 is a big impact when both people have contributed a lot to CPP over the years.

WHO IT AFFECTS: These rules almost provide an incentive to only have one working partner over the years. It hurts couples in which both partners worked full time. It especially affects couples who both work and in which the male is much older than the female, as this will lead to a longer period of one CPP payment as opposed to collecting two.

HOW TO FIX IT: Most defined benefit pensions have a survivor pension that pays out 60 per cent to 70 per cent of the pension to a surviving partner. You could change the CPP so that if a survivor is already receiving a full CPP payout based on her own contributions and her partner dies, she should receive 60 per cent of their partners’ CPP as well. Essentially make the maximum payout to an individual up to 160 per cent of a full CPP payout. In order to fund it, we could slightly lower a full CPP payout for everyone. In cases where only one person contributed to CPP, and one of the couple dies, then that person would be capped at receiving 100 per cent of the CPP. In this way, a lifetime of CPP contributions doesn’t go for naught if one spouse dies.

4. The Canadian dividend gross up costs OAS dollars

THE SITUATION: In simple terms, Canadian dividends from public corporations are more tax efficient than interest income and foreign dividends. For example, at $70,000 of income in Ontario, the marginal tax rate on income or foreign dividends is 29.65 per cent but the marginal tax rate on eligible Canadian dividends is just 7.56 per cent. This is a very big positive for investing in Canadian stocks that pay dividends. However, there is one nagging problem. The CRA likes to make things complicated, and in order to sort out something called tax integration for corporations, they have set up a complicated way to tax Canadian dividends. The tax formula is to ‘gross up’ a dollar of Canadian dividend income by 38 per cent and then apply a dividend tax credit to get to the right amount of taxation on the dividend. When the CRA determines your income for a variety of income tests, they take your net income — which includes the grossed up dividend income.

WHY IT MATTERS: We discussed the minimum OAS clawback at net income of $79,000. Let’s say you have $70,000 of taxable income from RRIFs, interest and global dividends. At this amount you would receive full OAS. Instead, if you had the same $70,000 of income but it was all Canadian dividend income (an unlikely scenario but good for making this point), it would be grossed up by 38 per cent, and your net income would be considered $96,600. Now your OAS would likely be clawed back by $2,640 a year.

WHO IT AFFECTS: This is an issue that exists for no good reason. At the end of the day, it isn’t the worst of the festering four, but does slightly punish seniors who invest in Canadian companies that pay dividends, especially those who check in around the $80,000 income bracket and are already having some OAS clawed back.

HOW TO FIX IT: I am sure that the strategies around corporate tax integration are complicated, but on a personal tax return, is it that hard to simply tax Canadian dividends using personal tax rates without any gross up? If there was no gross up calculation on a personal tax return, then there is no longer an OAS net income issue. Problem solved.

Reproduced from the National Post newspaper article 23rd January 2020.

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

This alternative to stocks and bonds is gaining a following among wealthy investors

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I hear a lot of the following these days:

“The stock market is too volatile and there is a recession coming. I am nervous about stocks.”

“With interest rates so low, I will lose money owning bonds after tax and inflation.”

“Preferred shares have not performed very well over the past few years so I don’t want those.”

What often comes next is a question similar to, “If I don’t want to put money into those, do you have anything else you might recommend?”

As it turns out, we do have a lot that we would recommend, and it generally comes under the category of “alternative investments,” which are not publicly traded on markets. Most of the investments that we have in this area have been providing steady returns in the six per cent to 10 per cent range annually over the past several years.

Before you think that these are some strange and extreme types of investments, it is worth noting that according to Benefits Canada, almost 40 per cent of Canadian pension plans are now invested in alternative investments. The plan managers are doing this for all of the reasons raised in the opening three quotes. They are worried about volatility and risk-adjusted returns from stocks. They are especially concerned that in a low interest rate world, the plans can’t generate the required returns with only traditional conservative government or high-quality corporate bonds.

While alternative investments include infrastructure, commodities and private equity, much of our investment focus is in the areas of private debt and real estate. In a nutshell, private debt is lending that is not done by traditional banks and does not include bonds traded on public markets. Ever since 2008, the banking landscape has changed and their lending strategy narrowed. This left many companies and individuals who required debt to look for alternative sources of funds. Over the past decade, private debt has grown over four-fold and is now close to US$1 trillion in assets globally, according to the alternative credit council. Our real estate investments, meanwhile, tend to be focused on managers that lend to developers and building owners and who have a global reach.

To help understand the increase in interest in alternative investments, and why the returns are higher than most publicly traded bonds, here are some examples of how private debt works. In some cases, the borrowers can be higher risk than traditional banks are comfortable with, but often the borrowers fall into a variety of buckets that banks can’t or won’t service for other reasons.

Examples include a business that requires a loan to close an acquisition. The business may be a perfect candidate for a loan but requires the funds in 3 weeks, while a traditional bank may take 3 to 6 months to approve it. Eventually the company may shift its borrowing to a bank at lower rates, but in the short term, the company is fine paying a high interest rate for the benefit of having the financing completed quickly. In other cases, a company may be in an industry that a bank may not lend to for reputational reasons, but which might otherwise be a great candidate for lending. For personal borrowers, sometimes they are business owners with a lot of assets and good credit, but low personal taxable income. A bank may not give them a mortgage but a mortgage investment corporation may think they are a great loan candidate, especially if they are only lending them 70 per cent of the value of their house, and the house is the first collateral on the loan.

In all of these cases, the borrowing rates would be higher, and often could be anywhere from six per cent to 20 per cent depending on the situation. It is these borrowing rates, along with strong risk management practices and full collateral that can provide steady returns at rates much higher than public bonds. These represent just a few examples of the many situations where someone is willing to borrow at high rates, for the ability to get the lending that they require.

The benefits to the investor are significant. First, they provide investment diversification and very low connection or correlation to the stock market. Second, over the past five years (as many funds were not around prior to this), returns have been quite steady with very low downside volatility. Having said that, a full investment cycle of 10 to 20 years would probably provide a little better test. And third, returns are often relatively high, with many funds providing returns in the six per cent to ten per cent range.

The main negative to private debt investments is that they are not very liquid. While publicly traded securities are often easily sold daily, many private debt investments might require anywhere from 30 days to a full year to redeem. This is one of the main reasons why private debt might only be one component of an overall portfolio. Because the risks on lending are often only as strong as the operational skill of the manager and the security against the loan, it is important to be able to assess whether any particular manager has top level skills to minimize the risk of losses.

While every person is different, in the 2019 investing world, we often have 10 per cent to 35 per cent of a clients’ overall portfolio invested in a diversified mix of private debt and other alternative investments. If your portfolio is 100 per cent invested in publicly traded investments, it is worth noting that many wealthy individuals and most pension plans believe that you are making a mistake. Now may be the time to consider looking beyond traditional investments to meet your long-term goals.

Reproduced from the National Post newspaper article November 18, 2019.

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

Ted Rechtshaffen: Why I made my daughter pay for her first year of university

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Teaching financial responsibility and financial lessons should be an important part of a university education

A few years back I wrote an article that was not very popular with high school students. I suggested that a great financial lesson to teach a child or grandchild is to have them pay for at least one year of post-secondary tuition, ideally the first year. Among the many reasons is that the child becomes a partner in their own education and it helps them to take school seriously from day one.

Well, now my oldest child is in first year university and she has paid her first year’s tuition. So far, it didn’t turn out to be that difficult.

One of the key lessons is that I told my daughter of this expectation when she was in Grade 8 or 9 so she had time to work and save up money. Thankfully, she took on the challenge and she has been a good worker and saver along the way. I know that this will not work so smoothly with different personalities. One important benefit of having a responsible oldest child is that my two younger children looked at their sister and have said, “I better start working at 14 or 15 so I will have money to spend and have enough for tuition in first year.” The bar has been set and the expectation communicated.

This all sounds nice, but the important financial lessons are just getting started.

In the days before heading off to school, my daughter asked me a good question. Who will pay for my basic expenses that aren’t covered? Clothes, food beyond the meal plan, some extra spending money. We could answer one of three ways: 1) You are covering all of it; 2) We are covering all of it;
3) We will help cover it.

I know what I don’t want to happen. I have seen many young adults graduate from university without ever being responsible for their own bills and their own budgets. Suddenly at 22 or 23 or 24 the parents are surprised that their kids do not have any of these important financial skills. We view this as an important part of her university education.

What we want to do is to teach financial responsibility and financial lessons. After some thought, we decided that we were not comfortable with either of the first two answers. We were more comfortable with number three, but that still leaves important questions such as: How much will we help? How will you receive the help? What happens if you “run out of money”?

Here is how we answered them.

I reviewed this with my daughter to come up with what we thought was a reasonable budget for these expenses. I told her that we would review it in January to see how it was going.

I told her that I want to pass financial responsibility for her spending to her. That meant that we were going to transfer a monthly amount to her bank account at the beginning of each month. That was hers to use as she saw fit, but she is not getting any more money if she runs out. We don’t want to tell her how to spend her money, we want her to figure it out. If she wants to spend all her extra money on Zola, her African Grey Parrot (don’t ask), and nothing else, it is up to her.

If she does run out of money, it isn’t a crisis. She has a roof over her head and a food plan. She can last until the following month.

Another area for financial lessons comes from credit cards. I actually want her to get a credit card. I want her to understand that putting things on a card is simply deferred payment. If she is late paying, I want her to understand the interest rate. I want her to understand that a minimum monthly payment is not the amount owing.

If the credit card bill comes to her parents, she will not learn these important lessons.

There are a few cards with no fees that require no personal income, and can be obtained by a student as long as you are a Canadian resident over 18.

A great resource to find these cards can be found here:

https://www.savvynewcanadians.com/best-student-credit-cards-canada/

Most importantly, we want to raise someone who appreciates that money doesn’t simply come from her parents. She needs to work for the money and understand its’ value.

She needs to learn to be a good shopper.

She needs to learn how to pay bills.

She needs to feel the consequences of being a saver or a spender.

Ultimately, just like the other parts of being a parent, we want her to develop the skills to be a strong, smart and independent person. The only way that will happen on the financial side is by giving her the freedom to succeed and fail financially. The best way I know to ensure financial problems is to not give your child any of these tools until they have a full-time job.

As someone once told me, “Little people, little problems; big people, big problems.” Just as in other parts of life, it is much easier to learn lessons from the little problems so that you don’t have to face big problems unprepared.

Reproduced from The Financial Post – October 29, 2019.

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