Entries from December 2019 ↓

Smells like teen spirit

DOUG  By Guest Blogger Doug Rowat


Thank god my kids aren’t yet teenagers; however, my seven-year-old daughter is already asking for a cellphone, so I’m getting a sense of what’s in store for me. I’m probably doomed.

So, for those of you who do have teenagers I won’t presume to offer advice regarding how to talk to them; however, eventually all parents will have to have ‘the money talk’. And here I might be of service. Below I offer my best advice.

Explain to your teenager where money is really concentrated. Teens frame the world around their own interests and through their own social-media experiences. Therefore, they often focus on celebrities and music. Teenagers think that wealthy means Taylor Swift, or Jay-Z and Beyoncé. Point out that the real wealth is held in the financial industry. The below chart shows how much top-celebrity-earner Taylor Swift made in 2016 versus what some of the most successful hedge fund managers made. Needless to say, there’s no comparison. This doesn’t mean that you should point them towards a future in finance. Far from it. There are already too many of us in this business. The world needs more artists, musicians and poets. However, it’s still important that they understand where the real wealth lies.

Shake it off: Taylor Swift earnings vs hedge fund manager compensation

Source: MarketWatch, 2016 data

Teach them that markets sometimes go down. We have many clients who are inexperienced investors, which, of course, is fine—it’s our responsibility to educate them about market volatility. However, ideally, clients have already learned, long ago, that volatility’s a normal, in fact, expected, part of capital-market investing. Bad stretches occur every year, but the vast majority of the time markets end up in the black. Educate your teens that negative intra-year periods occur regularly, but that they shouldn’t become unsettled by this temporary weakness. The chart below from JP Morgan is a great visual to show young investors. Intra-year market drops for the S&P 500, the world’s largest equity benchmark, are a constant reality and sometimes they can be severe, but seldom do they result in the full calendar-year returns also being negative. Stay invested. Markets need to take breathers but virtually always move higher in the long run.

S&P 500 intra-year declines vs calendar year returns: despite average intra-year drops of 13.9%, annual returns have been positive in 29 of 39 years.

Source: JP Morgan

Questions on first investments? Suggest health care. When you’re a teenager you assume that you’ll live forever and you surround yourself with other young people, so it’s easy to lose sight of the fact that the world is, relative to a teen, a much older place and rapidly getting more so. If teenagers think about investing at all, it’s usually in the context of what they’re familiar with. For example, “I use Uber, so that must be a good investment.” (You might explain to them that Uber has, in fact, been a terrible investment.) Encourage them instead to think long term and to broaden their lens. As the chart below shows, the global aging trend has dramatically accelerated in recent years and will continue to do so. Health care is critically important to an ageing population. It’s no coincidence that over the past 10 years the S&P 500 Health Care Sector Index has returned 285% on a cumulative total-return basis, easily outstripping the still-impressive 248% gain of the S&P 500. More so than us parents, your teenager will fully benefit from the upcoming, multi-decade shift in global demographics. Over time, your teenager can (and should) continue to add more diversification, but health care is a reasonable first investment and it creates more interesting talking points than a plain-vanilla balanced fund.

Global age trend: health care makes for a reasonable first investment

Source: United Nations

Have them open a TFSA. You’re allowed to open and contribute to a TFSA once you turn 18. You don’t even need a job (earned income) to start contributing to one. Though the contributions made to a TFSA are not tax-deductible, the investment gains within a TFSA are not subject to capital-gains taxes. Tax deductibility isn’t a big priority for most teenagers anyways as they likely aren’t earning much and are probably in the lowest tax bracket. However, the tax-free growth is an important long-term advantage especially when you consider my next point below. The cumulative TFSA contribution limit currently sits at a meaningful $69,500.

Encourage them to start investing early. As my partner Ryan perfectly illustrated last week, through the power of compounding growth, if your teenager starts investing early and saves consistently they’ll have exponentially more money in retirement than their less-disciplined peers (see chart below). Now, I recognize that these initial savings assumptions are aggressive for a teenager, but the overall point is still clear: start early.

Investing early can have a dramatic impact on eventual retirement savings

Source: Turner Investments; Assumptions: saving $12,000/year at a 6% CAGR to age 65. X-axis represents years of investing.

You can, however, tell them that they don’t necessarily have to start this early:

And, incidentally, why this album matters more than any other will be my daughter’s next, non-financial, lesson.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.


Cher Bill

The ink was barely dry on young Scheer’s take-this-job-&-shove-it letter when news on what the T2 Libs have in store for this confused and snowy land emerged. Finance guy Bill Morneau’s ‘mandate letter’ was released Friday – essentially the instructions given to the main economic minister from the PMO. This is an outline of what we can expect in the coming budget.

So sit, clutch some furniture or hold your dog’s paw as you proceed. Under no circumstances should the following be read alone. The mandate:

Defang the Stress Test.
Remember the dumbest plank in the Tory election platform? Yes, to gut the mortgage stress test as the housing lobby had been begging for a year. The Cons promised to ‘modify’ it if elected, and were immediately hugged by the Canadian Real Estate Association. Realtors argued that by reducing the amount of money first-time buyers (who have no money) can borrow the test was depressing sales and prices. Properties were becoming slightly (…oh, the horror…) more affordable as a result. Commissions were down. Mortgage lenders were sleeping in their vans.

Well, it’s coming. Morneau’s been instructed to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.” That does not mean making the test harder. Just the opposite. And so the political manipulation of the market continues. Combined with cheapo borrowing rates plus the shared-equity mortgage, it’s clear Ottawa is trying to recreate the Spring of 2017. Dog help us.

Slap on a National V&S Tax.
Soon the country will have its first pan-Canadian federal real estate tax – another order just given to Bill. The annual ‘vacancy and speculation’ tax will initially be set at 1% of a property’s value each year, to be paid by any investor not resident in Canada. It’s another example of what this pathetic blog has been yammering about recently as real estate turns into the new new thing for governments to Hoover. Of course this will do nothing to make houses and condos cost less, especially when the government is about to geld the stress test and increase demand.

But the basis of successful politics is “us vs. them” and that requires an enemy. One that doesn’t vote is even better. Meantime any national law of this nature involves tracking everybody’s activities. Like BC. With fangs.

Whack the Rich.
Trudeau’s first big moves in the last mandate were to gut the TFSA contribution limit and bring in a new tax bracket to vacuum $2 billion more a year from high-income earners. Not the super-rich in terms of assets, like Bill Morneau and his billionaire wife, but those nasty doctors, lawyers, vets, surgeons, dentists and small business guys making two hundred grand a year and employing people. Well, there’s more coming.

The new luxury tax, for example. If you buy a boat or a car or an RV worth more than a hundred grand a fat 10% tax will be applied to the price. That’s on top of HST, and you pay the bill in after-tax dollars. Just imagine what this is going to do for the recreation business.

Morneau has also been instructed to review “tax expenditures” for the purpose of “ensuring that wealthy Canadians do not benefit from unfair tax breaks.” So what are tax expenditures? Vehicles which reduce federal revenues, like TFSAs, RRSPs, RRIFs, LIRAs and RESPs. Also included are all the tax credits and breaks, from tuition to child care expenses, to principal residence capital gains exemption, age credit, basic personal exemption, interest deductibility etc. Oh yeah, plus the capital gains inclusion rate and dividend tax credit. Gulp. Oops, almost forgot – Morneau’s also been told to whack high-income people getting stock options form their established, ‘mature’ employers.

So there you go. Trudeaunomics in a nutshell. Pander to homebuyers by allowing over-borrowing and increased debt. Blame foreign dudes. Increase government spending and the river of red. Penalize successful people because it’s unfair they should have more than you. And rejoice that the guy who got the most votes was just nailed to a tree.