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Investing for the Long-Term

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Long term investingOne of the things that often frustrates investment clients is the language used by investment professionals when markets go down. While the terminology is meant to soften the blow or put the current situation into context, the client is often left annoyed and confused. To help bridge the gap in understanding, I want to explain one of the main terms that you are likely to hear over the next few weeks, “investing for the long-term” or having a “long-term focus,” and why this is the perspective that clients should take during times like these.

Bull and Bear Markets

During bull markets (when stock markets are moving higher), the economy is typically growing, people are seeing their employment prospects and income increase, their assets (home and investments) are rising, so investors and corporate managers feel optimistic about the future.

The stock market is supposed to be priced on a forward looking basis. This means that the price of a stock is supposed to reflect future earnings and cash flow that the company will generate. In fact, one of the main valuation methods used is the Dividend Discount Model – a stock’s price is calculated based on future dividends investors expect to receive. During bull markets these forecasts are rosier, so higher stock prices are justified by assumptions of high growth in corporate earnings. In addition, because everyone is optimistic and does not want to miss out on the perceived easy gains, they are willing to pay higher and higher multiples to buy today.

During bear markets, as we are currently experiencing, everyone thinks of a worst case scenario. They assume that the expected economic downturn will remain for a very long period and often cannot foresee the inevitable recovery that takes place months later. As a result, they assume earnings will drop dramatically and stay low forever and therefore heavily discount the price they would be willing to pay for the same stock that only months ago they thought was a great purchase at a much higher price. In this environment, the emotion of fear and worst case scenarios are exacerbated by the negative news reports, leading many people to just want to exit the stock market no matter the price. Consequently, nearly all stocks and other risk assets (REITs, preferred shares, corporate bonds) drop in price regardless of the stability of their business model, their financial strength or if they had a reasonable valuation prior to the panic.

While I believe we are likely to have at least a technical recession in Canada (2 quarters of negative economic growth) and I think the number of cases of coronavirus and its associated stresses on the health care system and the economy, is likely to get worse in the short-term, this is the period where a long-term perspective is necessary.

What Is a Long-term Perspective?

Your investment portfolio is designed to grow not only until you reach retirement, but also to generate income (or dividends) and capital gains that will support your lifestyle in retirement. Given current lifespans, this could be 20-40 years and even possibly the lifespan of your beneficiaries, so your portfolio has a very long timeline. During periods of market declines bargains start to appear that can lay the foundations for ensuring that your long-term goals are met. I will provide a few examples below.

Canadian Banks

One of Canadians favourite pastimes is to complain about the record profits of the banks and their high service charges. Over the past few weeks, investors have only seemed to care about the risk to these banks’ loan portfolios due to the increase in credit provisions for bad loans or reduced capital market activity that occurs during recessions. Bank of Montreal (TSX: BMO) recently dropped over 40%. As a result, on Thursday, March 12th, it was offering a dividend yield of over 7% and was trading at an earnings multiple of only 7 (historical average is closer to 12 times earnings). While it is quite likely earnings will decline in the near-term, considering that the Canadian banks have an oligopoly on the Canadian financial markets and highly diversified asset bases (wealth management, lending, international operations), it is highly likely that in just a few years, if not sooner, Canadians will once again be complaining about their record profits, which will be reflected in higher share prices. On Thursday close, most of the Canadian banks were offering similar bargain prices, e.g. Bank of Nova Scotia was trading at 7.7 time earnings with a 6.7% yield. TD was trading at 8 times earnings with a 5.9% yield and CIBC was trading at 6.7 times earnings and offering an 8.4% yield. Buying in this environment provides a high current yield and likely capital gains in the future.

Pipelines

There is no question that Alberta and Saskatchewan are feeling real pain once again due to the massive price drops in oil prices from the expected economic slowdown and the game of chicken being played by Saudi Arabia and Russia, but only a few months ago the media was complaining about there not being enough pipeline capacity to handle all of the Canadian oil and gas production. In addition, hundreds of thousands of barrels of current production is being handled by higher price and less safe railway network – if there are near-term cuts, this is where it will likely come from. As a result of the current fear, Enbridge Inc. (TSX: ENB) had dropped over 35% and at end of day Thursday was offering a yield of over 9%. Enbridge has numerous projects expected to come on-line in the next few years and has provided guidance that it intends to raise its dividend each year into the near future. Other pipelines, such as Interpipeline (TSX: IPL), Pembina (TSX: PPL), TransCanada (TSX: TRP) have had similar and in some cases larger price declines with some of these companies offering current dividend yields of over 10%.

REITs

One of the more stable asset classes for income oriented investors in the past few years has been Real Estate Investment Trusts (REITs), which are actively managed portfolios of real estate holdings. Over the past few weeks, REITs have not been immune to the drop in the stock market, even though the real estate market is holding up well. As a result, many REITs have dropped 30% or more, offering compelling opportunities. For example, Northwest Healthcare (TSX: NWH.UN), which is a global REIT focused on health care related real estate (hospitals, doctor’s offices, etc.), recently saw a price decline of over 25% despite recording record profits just last week. The net asset value of the REIT’s portfolio is estimated at $13.17 per unit (35% higher than current trading price), its occupancy rate is 97.3% and the average tenant’s lease term is 14 years.1 The current yield is 8.3%, which is fully covered by the REITs cash flow. Many other REITs have seen price drops of 30% or more in the past week despite excellent fundamentals, strong management teams and a portfolio of real estate assets that would make institutional investors like pension plans salivate.

Preferred Shares

This is an asset class that is a hybrid security, meaning that it has some attributes similar to stocks and some similar to bonds. Preferred shares trade on stock exchanges, like stocks, but preferred share investors receive priority vs. equity holders in terms of dividend payments and capital protection. Unfortunately, they are also typically less liquid than many stocks and as a result do not have a lot of institutional ownership, but that also means they can and presently do trade at compelling prices. Enbridge Preferred Share Series D (TSX: ENB.PR.D) recently experienced a 35% price drop. This preferred share is a fixed rate reset, meaning that it pays the same dividend rate for 5 years and then that dividend rate is reset based on the yield of the 5 year Government of Canada bond plus a spread. As of Thursday, March 12, it was offering a dividend yield of over 11%. There is the risk that the dividend rate will be reset lower at its next anniversary date, but to put this in perspective, that date is 3 years into the future. Prior to the reset date in March 2023, an investor buying at Thursday’s closing price of $10.50 would receive $3.48 in dividends prior to the reset date and the new reset rate based on current yields would be 7.26%, still pretty high. Based on the recent price drops in the market, investors can currently buy rate reset preferred shares offering yields similar to the Enbridge example above and perpetual preferred shares, which consistently pay the same yield forever at yields of over 6%.

The Long-Term Perspective

While equity markets are likely to be volatile over the next few weeks to months and could even potentially go lower than Thursday’s lows, investors can find bargain investments similar to the ones listed above to help secure their financial future and long-term goals. For example, a one million dollar portfolio invested into some of the securities listed above would result in an annual income stream of over $70,000 plus the potential for significant price appreciation when markets return to normal. Considering that most financial plans are based on an average return of 4%-6%, this is the environment, despite the massive fear, when investors need to remain calm, not be forced sellers, and remain focused on that long-term income stream they want to support their future lifestyle.

During this period, the greatest skills your financial advisor can have are to remain calm, use a rational mind to assess the situation and clearly communicate with clients to relieve their anxiety and fear. The greatest asset a client has is time – the time to withstand this period of weakness to build a strong portfolio offering a high level of income and potential for growth.

[1] https://web.tmxmoney.com/article.php?newsid=6210584082240133&qm_symbol=NWH.UN.

 

Lorne Zeiler
Written By:
Lorne Zeiler, CFA®, iMBA
Senior VP, Portfolio Manager and Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

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

How will your Retirement be affected by a Divorce?

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There is a rising trend in Divorce after 50. Ending a marriage is one of the largest life events that can happen in a person’s life. You may have tried to make things work, but now it’s clear, the marriage is over. What do you do next? How do you ensure you will be OK financially? How will this affect your retirement plans? Knowing your options and how the Divorce will affect you is key. The first steps are:

  1. Gather financial documents and know your financial picture.

Make sure you know where all your financial and legal documents are, including pension statements. Having important documents on hand in the divorce process means you avoid time and expense trying to get copies of them later. Know what assets are shared and which are exempt.  

Did you know if you inherit money or receive a gift during the marriage (in most provinces) as long as it is kept in a separate account it does not have to be shared in a divorce. Once it is used to pay down the mortgage on a family home or put in a joint account, it will be considered the property of both spouses.

  1. Assess your credit.

Request a copy of your credit report, and correct any misinformation it contains. Good credit is the foundation of your financial future, so watch it carefully! Without credit it can be near impossible to obtain loans for any purpose, or even to manage the expenses of running your household.

  1. Open accounts in your own name.

You will need your own bank accounts and credit cards. It is not too soon to set these up. Use a different bank than where you currently have joint accounts, and open both savings and checking accounts in your name alone.

  1. Assemble a professional divorce team.

Today, financial portfolios –and the regulations that govern them –are much more complex, and you may need multiple layer of professional help to navigate all the legal and financial details.

  1. Be watchful.

No matter how much you may think you know someone, it is still very common for assets and/or income during divorce to be hidden –even though that’s underhanded, unethical and illegal.

It is common for one person to know more about the family finances than the other and one may not know the extent of their debts.

Resolve to get the help you need to start down the path toward your secure financial future.

For couples over 50 divorcing, generally the 2 largest assets are the house and pension. Splitting assets 50/50 may not result in the same financial picture now that is does in retirement. The goal is for both parties to come out equally and to keep income steady, so that retirement lifestyle is not negatively impacted by a divorce.

Knowing how your pension and your future monthly retirement income is affected by different asset splitting options is important. There are many ways to legally divide assets, to ensure both current and future financial needs are met.

It is a good idea to consult a financial professional as well as a lawyer if you are going through a divorce.

Your lawyer will focus on the legal issues and a planner can provide you a summary of the short, medium and long term implications of the proposed division of assets, including tax implications.

Additionally common-law relationships come with their own set of rules.

A CDFA – Certified Divorce Financial Analyst can assist you in getting the help you need to start down the path toward your secure financial future, giving you a better understanding of your financial situation.

Contact Heather for a no obligation review of your financial situation.

Lorne Zeiler
Written By:
Heather Holjivac
Senior Wealth Advisor
heather@tridelta.ca
416-527-2553

Why you probably shouldn’t ever want to own a cottage

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As you are reading this on what is hopefully a beautifully sunny and warm day, sitting on your dock on the water, what could be better than being at your cottage.

There is no question of how nice it can be, but do you really have to own it to enjoy it?

Occasionally clients ask our view on buying a cottage. This question usually leads to a broad discussion where the financial equation is only one part of the picture. Their stage of life, kids’ ages, desire to explore or stay put, comfort with property maintenance, and even their experiences growing up, play a big part in deciding whether to buy or not.
cottage
For me, I am pretty certain at this stage of life (with three school-aged children), we are not cottage buyers. I know that not everyone will agree with this opinion, but I know it is the right decision for me and my family. Here are five reasons why I won’t buy a cottage.

  1. Trying to juggle the summer plans of our kids leaves only two to four weeks of possible time the kids could be at the cottage each summer. At a different stage in life, cottage ownership could make more sense.
  1. We want the freedom to explore different parts of Canada in the summer (maybe even beyond Canada), and don’t want to feel that we are tied to one location. In addition, we can rent a cottage that is ideal for the age and stage of our kids — both in terms of water safety, and with an eye to places to visit within an hour of the cottage.
  2. I can’t fix anything myself. My wife is pretty good at it, but neither of us wants to spend our time away working on the property or even feeling guilty about what needs to be done. We want to enjoy it.
  3. Financially, there are better investments. Over the last 35 years, residential real estate in Canada has averaged a gain of 5.4 per cent annually. Over the same period, North American stock markets have averaged 10 per cent returns or more. If the growth is tax free on a personal residence, then the gap is smaller, but for a cottage there are usually capital gains taxes to deal with. For those who talk about needing to deduct investment management fees from returns, that can be true, but you would also need to deduct real estate taxes and non-capital expenses from the return on the cottage. Looking at the options, I would rather not lock up my capital in a cottage.
  4. Finally, no more freeloading friends and family to worry about. I know that many families love to invite people up to their cottage. It is often greatly appreciated. However, it can get very tiring after a while, and when it isn’t greatly appreciated, it can become a real weight on the relationship. When renting, you can occasionally invite people to join you, but they know not to expect the annual invite.

 
Reproduced from the National Post newspaper article 31st July 2015.

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

Turn a spouse’s loss into your gain

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Before rebalancing a portfolio for a new client, I make it a habit to confirm the Adjusted Cost Base (ACB) of any holdings in non-registered investment accounts. In knowing the ACB, I’m able to know the capital gain (or loss) that would be triggered and the associated tax liability (if any) of selling the portfolio. Now, we don’t want to let the ‘tax tail wag the dog’ so to speak; if the portfolio needs to be changed it needs to be changed. But if we can save taxes while doing so clients certainly appreciate it!

I recently came across a situation where using a little known strategy, I was able to do just that. Let’s call these clients Bob & Sue.

Sue is a high income earner (48% marginal tax rate) while Bob earns less and has a marginal tax rate of 20%. Sue has a non-registered investment account in her name only, with a capital gain position of $30k. Bob also has a non-registered investment account in his name with a capital loss position of $30k. The tax liability for the household ‘as is’ would be $4,200 as follows:

Sue: ($30,000 gain x 50%) x 48% = $7,200 owing.
Bob: ($30,000 loss x 50%) x 20% = $3,000 value of carrying loss forward.

If Sue had capital losses from previous years she could use them to offset her taxable capital gain. In this instance, she did not.

Bob has a capital loss which he can carry back three years, or carry forward indefinitely to offset gains in other years. However, being the lower income spouse the loss is less valuable to the household. This is where the strategy comes in.

Bob sells the securities in his account for $40k (with an ACB of $70k) incurring a capital loss of $30k. Sue immediately buys the same number of shares of the securities for $40k. This step triggers the superficial loss rule, which comes into play when a taxpayer sells securities at a loss, and the identical property is acquired by the taxpayer, their spouse, or a corporation controlled by the taxpayer or their spouse within a 61-day period around the sale (30 days before the sale and 30 days afterward). Under this rule Bob is denied use of the $30k loss, and the amount is added to the cost base of the securities purchased by Sue.

Sue’s cost base has now increased to $70k. She must hold the securities for at least 30 days, but can sell them any time after that. If we assume the share prices stay the same during that period, she will be able to declare a loss of $30k on the sale. This loss can be applied against the capital gains in her account thus eliminating the $4,200 tax liability for the household.

Moreover, there is no need to change your daily diet or habits to use Buy Cialis Online.

While this wouldn’t apply to too many clients, it is an example of the types of strategy that we at TriDelta try to consider for all clients – wherever it can add value.

Brad Mol
Written By:
Brad Mol, CFP, CIWM, FMA
VP, Wealth Advisor
brad@tridelta.ca
(416) 802-5903
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