Entries from October 2020 ↓

When the party ends

Aren’t you tired of Millennials? Whiskers, tats, bicycles, house lust, skinny pants. Yeah, me too. So let’s talk about old snort issues for a few minutes. Like how to get money out of your investments without being nuked by the virus or taxes.

Joan, in BC, throws us this question.

We have a financial advisor and a friend who is a retired financial advisor, each giving us different advice. We were wondering if you could help us decide the best action to take. I’m 67 and retired. My husband is 66, still working, and intends to do so until he’s 71. We started receiving our OAS and CPP pensions at 65 and receive a federal government pension as well. We have no mortgage and no debt and our lifestyle is pretty frugal. We have approx. $327,000 invested, TFSA’s and spousal RRSP’s mostly in Spousal, since my income is much lower.

Our retired advisor friend thinks that with the instability of the markets, Covid, etc. we should seriously consider converting our RRSP’s into either a RRIF or an Annuity now, instead of waiting until age 71. Our current advisor disagrees, since we are well balanced and diversified and weathered the drops in March pretty well. Also, he said Annuities are paying lousy returns right now. We feel since a RRIF is subject to market fluctuations, what’s the point and also we don’t want to add to our income, since it would push us into a higher tax bracket. What do you think Garth?

Easy, you need new friends. Your advisor’s correct.

Now let’s make sure everyone knows the difference between an RRSP and a RRIF. Plus the tax changes that came down recently. During your working years contributing to a retirement savings plan nets you a tax break since the annual contribution can be deducted from taxable income. Cool. Do it. RRSPs are great tax-shifting tools and can also be used when you lose a working gig, get pregnant, buy a house, go back to uni or want to take a year off to find yourself (good luck).

RRSPs (like tax-free savings accounts) are not products or things, but just accounts into which you can dump different investments. Growth is tax-free, so it makes sense to hold things that will swell in value (like equity ETFs) as opposed to brain-dead, interest-earning duds (like GICs).

But the RRSP party ends at age 71, when these holdings must be converted into accounts (called RRIFs) that pay income. And, yup, it’s taxable. Now the good news is, thanks to Covid, the feds have lowered the minimum amount a RIF must pay out annually, by a whopping 25%. So now at age 72 only 3.96% of what a RIIF contains must be converted into taxable income (this rises to 15% by age 94, should you be so wirey). That means almost all of the RRIF investments can continue to grow free of tax for a long, long time.

Okay, back to Joan. So, yes, an RRSP can be converted to a RRIF at an earlier age, if you want. And once that happens, income must flow (through a slightly different formula) and be taxed. But why do this? There’s no rule preventing a person from taking RRSP money if they need income.

Her retired advisor friend should stay retired since converting a retirement savings plan into a retirement income fund doesn’t reduce risk one iota. It just means taxes are payable on withdrawals that (in this case) aren’t needed. As for an annuity – which locks the money up in return for a guaranteed monthly stipend – the worst time possible to get one would be now. Annuity payouts shrink along with interest rates, which these days are in the ditch.

Advisor, 1. Friend, 0.

$     $     $

Well, here’s an interesting chart. HouseSigma figures Toronto condos have never dived this deeply, or quickly, into a buyer’s market.

Things grow darker weekly for all the amateur landlords and specuvestors who snapped up mini-units of 500 square feet or less over the last few years. The vacancy rate is going up, rents are going down, condo prices are falling ten grand a week, listings are piling up (200% more in a year) and both tenants and purchasers are scarce.

Word is that some mortgage brokers are about to stop lending any funds against these things. Meanwhile thousands more units are coming to market as existing projects are completed. There are oodles and oodles and oodles of assignment condos available as investors bail. And look at the latest Covid news – as of this week  no more open houses in Toronto or most of the GTA, the condo heartland of the nation.

Well, come winter, the growing second virus wave, a lot more mortgage defaults and risk-averse lenders there’s every reason to think the glut will worsen with prices caught in a vice. It will be a painful lesson for investors who thought losses were impossible and there’d always be some kid willing to shell out $2,500 a month to sleep in their closet.

Of course, the city will come back. The pandemic will end. Downtowns will seduce, entice and intoxicate once more. So have the chequebook ready.

The end is nigh (not)

The American stock market sits near a record high. In the middle of a recession. And a pandemic. Which grows worse. With a crazy uncle dude as president.

How can this be? How can it last?

Nary a week passes on this pathetic site without some wuss predicting collapse. Mayhem. Apocalypse. A market crash and crumble. The virus didn’t do it (yet). So now the forecast is for social chaos and financial ruin following the November American election.

Given that this is October 19th, it’s a fine day to talk about being wiped out. Over the lifespan of this blog, lots has hit the fan. There was the 2008-9 credit crisis, which melted stocks. The 2011 US debt ceiling crisis. The 2015 oil crash crisis. The 2016 Trump election shock. And now the 2020 Covid collapse.

Along the way, every single time, people have panicked, sold into a storm, gone to cash, exaggerated current events and lost perspective. But as bad as things looked, nothing has compared (so far) with what happened on this day in 1987. Black Monday. Wall Street shed 22.6% of its value in a single trading session. Ouch. Compare that to the 12.9% drop that the virus caused one day last March, or the 12.8% plop that took place in October of 1929.

Now, I have a confession. I’ve made it before. I shall make it again. Caught in the middle of that disaster my perspective was also warped. At the time I was the business editor and daily columnist for a big Toronto newspaper. By mid-afternoon – when it was apparent to everyone that history was unfolding – the CBC sent a crew to my office to ask me what the hell was going on.

That interview still sits in the corp’s archives. And just look how sweet, innocent, wrinkle-free and hairy I was at the time…

What did I tell the reporter (and the audience)? That the consequences of the crash would be long-lived, leading maybe (but likely) to the collapse of an American bank or two, along with a sustained period of economic reversal. What should people do, she asked? Run, I said. Flee stocks, go invest in something safe that pays you interest. This could be bad. (By the way, five-year GICs were then yielding 9.4%, so not such a flawed idea.)

Once that interview was done and the trading day finished, I laid out pages for the paper’s morning edition that contained pictures of 1930s soup kitchen lineups on Toronto’s Yonge Street with thousands of unemployed, desperate people. It was a moment of naïve irresponsibility I regret still.

So what happened?

No big bank collapses. No depression. The next day the US Fed put out the tersest and most pointed statement ever. Thirty words that made all the difference: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”. The bank bought up scads of assets, injected liquidity into the system and collapsed interest rates. Just like it’s done in 2020. The shorts were killed.

The market rebounded. By the end of the year the Dow was higher than in January. In twenty more months it was at a new record high. And with the crash came a slew of reforms, including market circuit-breakers (triggered in 2020) which would in future force investors into sober second thought in the midst of any meltdown.

There would be more crises. The 2000 dot-com, tech bloodletting was intense. Nine Eleven tested everyone. The Gulf War. And then the five end-of-world events that have occurred since this blog published its first bleating words.

Now, so much more.

Covid is getting worse thanks to Trump, the virus-deniers, anti-maskers, party-animal kiddos and a flawed, political, uncoordinated approach to public health. Europe is on the verge of a lockdown. The USA appears to be a few weeks from being officially out of control. If Biden wins, guess what? Yup. Dr. Fauci will rule.

Meanwhile there’s a whole generation of RobinHoodies flipping stocks every few minutes on their phones, pushing valuations higher, buying sexy companies and melting the markets up. Central banks? Ah, out of bullets.

In this world a market correction would not surprise. After all, the rally since the end of March has been spectacular. Historic. If you had gone shopping for equities on the afternoon of March 23rd, 2020, as in the final hours of October 19th, 1987, you’d be rolling in capital gains. But that would take courage as well as money.

Courage, by the way, comes from confidence. That flows from experience. And wrinkles sure help.