Entries Tagged 'Book Updates' ↓

The good stuff

ATTENTION modified

It’s a fact we fear loss more than we relish gains. No wonder most investment decisions are made because people occasionally have the crap scared out of them. That’s why your co-workers and questionable in-laws own houses and GICs and think investment advisors sport a blood-sucking proboscis. Actually with a good tie, most are attractively hidden.

As I’ve told you before, the greatest risk for most people (especially women) is not losing money, but running out of it. So, we make bad and emotional choices, motivated more to preserve capital than make it grow. As a consequence, Canadians have a dismal amount of liquid assets, fear capital markets and will probably have sucky retirements. Too bad.

Truth is, we haven’t had a good stock market fright since about this time three years ago. That was during the 2011 debt ceiling debate in the US, with the deficit exploding, politicians at each others throats and the prospect of the world’s biggest economy defaulting on its debt. Then markets dropped more than 10%, with daily gyrations of 500 points.

At the time this pathetic blog urged the metalheads to dump their bullion at a silly $1,900 an ounce (it’s now $1,226), and for everyone else to get invested because America was not going down. Since then the Dow has added 34%, the Toronto market is up 28%, the S&P 500 has swelled 78% and gold has plunged 35.5%.

More importantly, in the past three years the US deficit has dropped to the lowest level in eight years, and corporate profits have increased more than 25%. Now 200,000 jobs are being churned out each month, inflation is moribund and housing prices have gained a third of the ground they lost in the GFC. In other words, no US real estate bubble despite 3% mortgages and a resurgence in unemployment.

Meanwhile the US central bank – the Fed – has taken back almost all of its massive stimulus spending, and the economy has held. Wow. A lot of people who came here a year ago – when the idea of tapering was first floated (dropping the price of bonds, REITs and preferreds) – forecast economic disaster and stock market collapse if the $85 billion-per-month was curtailed. Well, now it’s almost gone and guess what? No impact. In fact the US grew at a fat 4% rate in the last quarter.

So what does this macroeconomic stuff mean?

In the past twelve months, while the stimulus was systematically scraped away, the S&P gained 19% and stocks in Toronto romped 23% higher. Bond yields basically behaved because inflation was tepid, and balanced portfolios have delivered double-digit returns – around 11%. Fixed-income stuff, like preferred shares, and rate-sensitive assets like REITs, have recovered from last summer. ETFs mirroring the equity indices have been Beyoncé-hot.

And it continues.

Yesterday markets hit record highs, even as bombs flew over Syria, the Scotch were revolting and Ebola turned into a global threat. Investors looked at the latest data showing a drop in US jobless claims, plus the Fed news that interest rates won’t rise until July, and kept on buying. Also at play was the news American inflation has dropped the most significantly in four years – which means you can get the good stuff (jobs and profits) without having to swallow the bad (higher prices and rates).

Stock markets may have a high and scary number attached to them (both the Dow and S&P are at a record index level), but expressed as a multiple of corporate earnings, things are way more serene. Because corps have been plumping their bottom lines for the past few years, we’re nowhere near the sleazy multiples of the dot-com era or the pre-crash of 2008-9. In fact, sustained high unemployment numbers are a kind of proof companies are more efficient and leaner than they used to be. Thus, it’s a better time to be an investor than an employee.

This makes Canadian real estate far riskier than equities. At least stock prices are supported by the moolah being generated by member companies. House prices in 416 or 604 by comparison, are completely divorced from the incomes of people buying them or the rents paid by those leasing them. These valuations are supported by a mountainous pile of debt and the tulip-bulb mentality of the masses.

Rich people seem to know this. They have far less net worth in a house than your cousin does. They love liquidity, and have a lot of fun buying stuff when people who read the Huffington Post are changing their shorts.

Maybe you should, too.

Family planning


Janice and Tom sleep together. They live together. They’ve got a mortgage. Even a kid. And a golden doodle. But when it comes to money, they just don’t trust each other.

“This is the way we started out,” she says, talking about their marriage six years ago, “and that’s the way we’re comfortable.” That’s code for, ‘I’m not going to answer to him about my spending.’ Tom’s the same. “We never argue about anything,” he says, “except money. Whatever. Not worth it.”

So they have two savings and chequing accounts each (RBC, CIBC), and a joint account they both contribute to for household expenses, the mortgage and bags of Iams chunks. She makes $105,000 as a health & safety consultant, and he’s a chef, at half the wage. She has a matched RRSP at work, while Tom has no pension. Only in the last year – after a mat leave and digesting the mortgage – have they started to save some money. In separate bank accounts, making 1%.

Janice and Tom are the kind of clients bankers love. They’re Joe Owe’s idea of perfect taxpayers. Because they won’t share money (the way they share fluids) these thirtysomethings pay way more in bank fees and taxes than they need to. It’s amazing how many couples are in similar circumstances. We sure seem to have an unhealthy relationship with money. More precious than love.

Well, this post is not about matrimonial intimacy, on which I am a renown expert, but income-splitting. By treating a marriage or common law relationship as an economic union, there are a mess of advantages – especially if you’re like these guys, with a big disparity between incomes.

Here are a few ways you can make romance work harder.

Open a joint investment account. Don’t accumulate secret piles of money in dead-end bank accounts, but pool it with your spouse and invest it jointly. This way you can get more momentum in a larger portfolio, plus be reassured that if something happened to your spouse the funds would pass to you without a legal barrier (not necessarily so with a bank account). Plus, the money this account makes can be split between you – a savings when one person is in a lower tax bracket. In fact many couples attribute all of the gains to the less-taxed person.

Open a spousal. This kind of RRSP is custom-made for Janice and Tom. She can contribute to a plan in his name, to her own limit. She gets to deduct all of the money from her substantial taxable income, while he gets ownership of it after a three-year seasoning period. Tom can then remove it at his lower rate, or run away with the doodle and open his own food truck.

Don’t share the expenses. That’s just dumb. The person making the most money in a relationship should pay the entire costs of running the household, including the mortgage. That way all of the income of the less-paid spouse can be used for investment purposes – because the proceeds will be taxed at a lower rate, building family wealth faster.

Invest the kid’s loot. The Child Tax Benefit cheques are not intended for silly things like day care or Huggies. Instead, open an in-trust investment account and stick that money into things your child will really enjoy, like ETFs and REITs. That way the proceeds are taxed in your child’s hands, not yours, since attribution rules do not apply.

Then hire him. If you have a business – incorporated or sole proprietorship – you can give your kid a job, pay him or her a wage, and deduct that from the taxable income of your enterprise. Just ensure that the work being done is ‘reasonable’ in the eyes of the CRA for someone of that age and skill level, which probably means Junior will not be your marketing consultant.

Then fund his TFSA. Once your child is 18, then you can stick cash into his tax-free savings account, and invest the money in capitals gains-producing assets. In fact, Janice should also do this for Tom, as should every spouse who is in a higher-income situation. There is no attribution of investment gains back to the donor, and all of the growth is completely free of tax.

Well, this is just a taste of things you can do to split income within a family and pay w-a-y less tax. Of course, you can also loan money for investment purposes to family members at the ridiculously low rate of 1% and have no profits attributed back to you. If you’re an old fart you can split pension income with your squeeze. Or your CPP. You can loan money to relatives to start a business, without interest, and maybe turn it into an allowable loss.

It’s a long list. But it all starts with trust. Share that first.