Entries from January 2017 ↓

The clueless

Jen makes big money. “Between four and five a year,” she tells me, “depending on billings.” She’s a anesthesiologist. I had no idea. She has $1 million in cashable short-term GICs at the Royal Bank (paying 0.7%). Phil’s at home (which is worth $2 million) on paternity leave for another five months. He earns a quarter of Jen’s take as an IT guy. No TFSAs.

In their forties, they’re rich by all measures, but financially clueless. Separate bank accounts. No joint assets. Two kids, no wills. Most family wealth is stuck in the name of the person in the 53% tax bracket. Huge income. No pensions. Success in spite of their best efforts to make mistakes.

Yeah, financial planning is hard, like math. But unlike the latter, nobody teaches you about tax shelters, investment assets or income-splitting. You have to pick it up in bank washrooms or on dodgy websites. It’s an interesting society we’re in when people can buy a two-banger house, make five times the average income, hold an esteemed professional position, and know diddly about money. That’s the mission of this pathetic blog. Saving Canada, one confused medical professional and IT dude at a time.

So it’s January, which is a good time to begin. I gave Jen & Phil some lessons in TFSAs (“First, never pronounce it ‘tiff-sa’… so embarrassing… ”) as well as what to do about RRSPs. The first thing to remember is the first place to put money – the tax-free accounts. The full limit has reached more than $100,000 per couple now, which means these are serious vehicles. If this couple keeps theirs topped up for 25 years with growth assets, they should have $1.26 million by the time thirsty underwear days arrive. That will provide an annual income of almost $90,000, which can be withdrawn 100% free of tax. That’s equal to almost $180,000 in earned income – and it doesn’t even mean a clawback of the government OAS/CPP pogey.

“So I should put the GICs in there?” Jen asked. After I recovered, I said no. Never ever waste a great tax shelter on interest-bearing assets. You are anaesthetizing your money, I said. (She got it.)

They also had no real idea of the difference between their TFSAs and RRSPs. Many don’t. They foolishly believe what the names imply – tax-free savings accounts are for saving and registered retirement accounts are for retiring. Silly people. In reality TFSA are for heavy-duty, growth-oriented investing while RRSPs are for tax-shifting – reducing the burden by moving taxable income from one phase of your life to another.

For example, Jen might have pumped money into a spousal plan in Phil’s name years ago, so he could draw it out while on paternity leave. That way she would receive a massive benefit (thanks to her tax bracket) while he could cash the plan in when not working, at minimal cost. Voila. Income-splitting and tax trashing.

Likewise, Jen has a big paycheque now but no assured income after retirement. So instead of drawing dividends from a medical corporation (like her misguided friends), she should take salary, earn RRSP room, then smash her maximum $25,370 annually into plan contributions. In retirement, in a lower tax bracket, she can retrieve the money at a fraction of the benefit she received investing it. Tax-shifting.

Of course, Jen needs to redeem her GICs and have a balanced, diversified, Trump-friendly portfolio put together for predictable long-term growth. She and Phil need to tear down the border wall between them and co-mingle their finances. With a joint non-registered account they can not only attribute at least half the gains to the lesser-taxed spouse, but also protect their family. That’s because with a joint account all assets automatically become the property of the other partner if one person walks in front of a streetcar. Or whispers ‘climate change’ near a Trump supporter.

And if Jen finds she messed up and got locked-in GICs instead of the cashable type, she can always make a ‘contribution in kind’, sliding the existing brain-dead assets themselves into her RSP (or Phil’s spousal). So for moving stuff she already owns into the plan she’ll get a fat refund cheque sent to her by the government. That’s because RRSPs favour the rich, and the more you make, the more you benefit. But don’t tell the deplorables.

High anxiety

Well that was no surprise. Stock markets took their worst one-day jolt since the US election on Monday, with triple-digit sheds in Toronto and New York. We told you it was coming. And to ignore it.

Donald Trump will be the inflation president, but also the king of volatility. If you have an all-stock portfolio, ensure an adequate supply of Tums is on hand. Download Leonard Cohen. Get a black lab. Buy yoga pants. Immediately stop reading this blog.

For the rest of you, there’s a predictability about having an unpredictable guy in the wheelhouse. It’ll bring significant investor opportunity on the way to higher markets. Trump’s a business guy. His cabinet is full of fossilized billionaires, senior execs, Goldman Sachs honchos, hedge fund managers and dudes that personify the status quo of capitalism. From this gang you can expect an historic pro-business agenda feeding US corporate profits. If he does carry through with a 20% corporate tax cut, it’ll be positively Kardashian.

So why did stocks lose ground Monday, while bonds and gold went up?

Easy. We all know he’s rash, impulsive, headline-seeking, impetuous, indefatigable and utterly inexperienced in governing. The Muslim ban was a big mistake. Picking a fight with Mexico was stupid. The wall is idiocy. Pissing off China is intemperate. And there’s lots more to come – governing not through the political process, but by hasty executive orders that can be dashed off without consultation or compromise. This is a formula for trade and foreign policy disasters. So, expect some.

For example, a senior Canadian military officer told me on Monday, if the Quebec City massacre had happened on US soil Sunday night, the Trumpian response would likely “have been devastating.” Expect that, too.

Now most Canadians (typical) see only the danger in all of this, not the opportunity. Witness the latest Nik Nanos poll done for Bloomberg

Household confidence among Canadians just fell to the lowest level since the US election period as Trump started talking about a 20% border tax, axed the TPP free trade agreement and mused about renegotiating NAFTA. People are worried. Since election night the share of folks who say the economy will get worse has climbed a dramatic 9%, now sitting at 33%. That’s a big premium over those who believe things will get better (21%).

“This is a noticeable drop coincidental with the U.S. election and focus on the Trump Administration looking to renegotiate the Nafta” trade pact,” says Nanos. And ditto for personal finances. Just under 29% say they’re worse off now than a year ago – an astonishing result given that last year investment portfolios rocked, house prices went up and oil prices doubled. Of course at the same time, Canadians grossly overspent, bought real estate at the peak and walked into record levels of debt.

Meanwhile the mainstream media is showcasing the hate-Trump sentiment that sparked widespread travel ban protests on the weekend, further painting the new president as an demagogic bully whose racist, xenophobic, isolationist nature is being revealed. What’s abundantly clear is that we’re in for a few years of divisive politics that could rend the social fabric of the world’s dominant country. We’ll also see some trade wars. Maybe a real one, too.

Thus, volatility. But also a unique time to make money.

Donald Trump is unlikely to measure his presidency in terms of how more people came to enjoy health care, how greenhouse gas emissions were curtained, how many desperate refugees were saved, how America grew in global respect or the male-female wage gap was closed. Forget that. Not important. Loser issues.

Instead it will be gauged by GDP expansion, corporate profitability, labour market participation, wage growth, energy self-sufficiency, job creation, car and house sales and equity market records. The rash cut in regs, corporate tax slash, repeal of banking controls and border barriers are all means to the same end – an economy on steroids. Bigger. Fatter. Greater.

As an investor it would be unwise to reduce your US exposure given what’s sure to come. So load up on those ETFs before you paint your ‘Trump’s a Fascist’ sign and protest for human rights and social justice at the US embassy.

Just in case.