A couple of years ago, a client asked, “Is there such a thing such as a “No-Risk” Investment?”.  That question can be likened to the search for the Holy Grail.  A definition for the Holy Grail, according to Wikipedia, (a source of information that most people use and all academics disparage), is “any elusive object or goal of great significance.”

2022 has been a year of decline and some recovery for those of us invested in the equity markets.  For those of us who had money earmarked for a specific purpose, we would be either greatly disappointed or we put off our decision to turn the investment into cash.  I know several people who delayed renovations and vacations because they did not want to trigger a loss on their investments.  There are risks within the equity markets just as there are significant opportunities.  Welcome to the Stock and Bond Markets!  For those people who do not like the ups and downs of the equity markets and want certainty, luckily there exist Guaranteed Investment Certificates (GIC’s), Money Market Funds and other interest-bearing investments.

Investments that have guarantees attached to them are not truly risk-free.  For example, a local bank has advertised their GIC’s with a terrific, compounded rate of return of 3.50 % for 5 years.  That sounds wonderful, but what is the “Real Rate of Return” on this investment once inflation and taxation are factored in?  Presently, inflation is running at approximately 6.9% so it is not hard to see that your buying power will be less in the future than it is today.  On top of that, income tax must be paid on your non-registered GIC investment.  The net result of this type of investment shows that by locking in for 5 years, you are not as far ahead as you may think.

So, what is a person to do?  In Canada, we have access to 2 investment vehicles that can reduce the tax risk.  If you are still young and are investing for retirement, a Registered Retirement Savings Plan will defer your taxes to when you redeem cash for retirement.  The other option, called a Tax-Free Savings Account or TFSA, eliminates the tax-risk totally.   

When trying to determine what is the best investment, the answer is usually not one or the other.  It is usually a variety of investments so that all manners of risk are spread sensibly.  Three thousand years ago, King Solomon, attributed to be the wisest and most wealthy man in the civilized world ever wrote: “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land.” (Ecclesiastes 11:2)

In conclusion, work with a competent financial advisor, especially as your wealth grows.  Because one’s money is so emotionally linked to us, a good advisor helps drain the emotion from your buying and selling decisions, while being able to supply some guidance on taxation.

Al’s Nuggets:

1. The advertised rate of return on a GIC is not what you really earn.  Get your advisor to calculate the “Real Rate of Return” factoring Inflation and taxes into the equation.  A good advisor should be able to figure it out on a financial calculator at their desk.
2. If you want to figure it out yourself, here is a good starting place:   https://www.investopedia.com/terms/a/after-tax-real-rate-of-return.asp#:~:text=To%20calculate%20the%20real%20rate,a%20dollar%20in%20hand%20tomorrow.
3. For most investments, especially mutual funds, you never lose until you sell! 
4. Next week’s blog will focus on income from investment funds.  Have a great week!

This past week was very nice for those of us who were broadly invested in both the Toronto and Dow Jones stock markets.  We were patiently anticipating a recovery and were at least partially rewarded for not selling and triggering a loss.  For those of you who are playing the long game by purchasing regularly, regardless of how the stock market is doing, you might have larger smiles on your faces because the purchases made through the spring and summer months should be showing gains due to Dollar Cost Averaging.

This week’s story will show you what can happen when you invest a consistent amount of money into an investment that is going up in value each month.  The attached spreadsheet shows that in each successive month as the price is going up, you will be purchasing fewer and fewer units with each dollar invested.  The average price per unit in this illustration is $14.70/unit.  The value of the account after the last purchase in December is ($14.70 x 816.39) =$12,000.93 – which is simply a breakeven proposition. 

The lesson from this week’s illustration, after you compare it to last week’s blog, shows that a continual upmarket is not necessarily your best friend if you are purchasing in small amounts every period, especially if you are a short-term investor. 

**For those of us with a significant amount of money just sitting in our savings/checking accounts, had we invested $12,000 in January of this hypothetical calendar year, we would have doubled our money in this illustration.  Showing the math, ((On January 1^st we purchased 1200 units at $10/unit.  In December the price is now $21/unit.) (1200 units x $21 = $25,200)).  ?**

Al’s Nuggets:

1. The stock market is simply a gathering place where people buy and sell goods, commodities, or livestock.  If you have mutual funds or participate through your employer’s group retirement plan, you are in the stock market!
2. It’s been my experience that trust, time, research and discipline are vital to making money.
3. The only thing easy about money is losing it.  If you want to get ahead, see #2 above!
4. You cannot time the market!  We never know when the value of an investment will drop or rise in price.  For this reason, it’s ideal to embrace a variety of strategies!
5. Guaranteed savings are not risk free!  That is next week’s story!

When contemplating investing with a long-term perspective, it probably is overwhelming to consider all the different options that are available to you.  For many of us that do not have a lot an extra money at the end of a month, a simple way to invest is put a small amount away on a regular basis.  This type of investing, called Dollar Cost Averaging, is very boring, but very effective especially when one is just starting out with a new account.  Many of my former clients engaged in this concept on a weekly, bi-weekly, monthly, or even annually depending on their desires and availability of cash. 

I have created this spread sheet to show what would happen if an investor were to invest $1,000/month to purchase units in a mutual fund that has a price of $10/unit on January 1^st.  On the first of each of the following months to July 1^st, the price drops by $1.00 per month and then in August the price starts go up by $1.00/month.  At the end of the 12-month cycle, the price has recovered to $9.00.   At year end year, the investor has 1841.27 units at $9.00/unit for a total investment value of $16,571.43.  The rate of return for this happy person is 38% (16,571.43/12,000.00)!

Your investment goal is to look for ways to get the highest number of units or shares at the lowest possible price per unit.  Having a low ACB (adjusted cost base) should always be your goal! 

My next blog will continue the theme of Dollar Cost Averaging.

*Dollar Cost Averaging works quite well with investment funds, but one should be careful with highly speculative investments whose underlying companies could go under. *

Al’s Nuggets: 

1. If you were wondering if you should work with an advisor, check out this:  https://www.fidelity.ca/en/advicecreateswealth/
2. People will purchase tomato soup by the case when on sale…. buying investment funds is like buying tomato soup on sale!

After our first year of marriage, we made the decision to buy a house.  Nancy and I were living in Regina and were looking at our future with a lot of hope and anticipation.  We had scraped up some money for a small down payment and went to the bank to see if we could qualify for a mortgage.  Because of our savings and our solid employment histories, we qualified for a $70,000 mortgage.  The bank’s offer was an open mortgage for 20 years with a 5-year term at 22%!  Fortuitously, Saskatchewan was gearing up for an election and the government at the time decided to launch a program to assist first time home buyers.  This incentive, the brainchild of the Conservative government of Grant Devine, had at its core the requirement of the new homeowner to work on the house.  This labor component, called sweat equity, helped those of us with modest means get our new home.  We decided to participate in the program because Nancy would be the general contractor and I would provide the labor after work and on weekends.  Thankfully we were young, bold and had some experience in construction because of my experiences on the farm.  Another important feature that made this plan work for us, was that the government helped all qualifying participants reduce the cost of interest by 6% which resulted in our interest rate being lowered to 16%. 

 The home package that we purchased was a prefabricated home from Nelson Homes out of Lloydminster, Alberta.  The sweat equity that we provided was in putting all the pieces together, insulating the home, nailing down the shingles, construction clean up, hanging the doors, installing the windows, painting, laying the baseboards and door trim, building the deck, and landscaping the yard.  The total cost of our house and yard in 1982 was $67,000.  The labor or sweat equity component worked out to approximately $20,000. 

During our construction period, Nancy and I did not have any time off for any leisure activities.  The one luxury that we did embrace was going to church and enjoying a Sunday brunch with our friends.  After brunch, we would go back to the construction site to clean up and prepare for the contractors that we needed to hire, such as electricians, plumbers, concrete finishers, and cabinet makers.  Sometimes, we had help from friends and relatives.  On one weekend in August, my father took a weekend away from the farm at Asquith to help us insulate and vapor barrier the ceiling.  The temperature that weekend was around 35 above (90 degrees F).  I still marvel at how we worked with the pink insulation in the heat and the sweat!

We moved into our house in October of 1982 after the final inspection.  Our housewarming party was a terrific celebration with all those who helped us.

Al’s nuggets:

1.  If you have more time than money or opportunity, physical hard work is usually good for the pocketbook and good for the soul.
2. Take advantage of what is available to you.  Sometimes there are incentives from governments or corporations that work in your favour.
3. Negotiate the terms of an agreement as well as the price of things.  For example, the open mortgage worked in our favour because the extra payments reduced the principle that we had to pay interest on. 
4. Enjoy this movie clip!  https://nam12.safelinks.protection.outlook.com/?url=https%3A%2F%2Fyoutu.be%2Fnd3Ms3LiBdQ&data=05%7C01%7C%7C3a8900ad9533414cc81108daaf277cf4%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C638014881381754618%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=dCPvKg40wqxQMLA1fqJTknji2arrsAzcmJ%2BJyPC01xk%3D&reserved=0
5. The movie, featuring Anthony Hopkins, is based upon a true story!  Check it out!

When I was high school, I loved and read as many old myths and ancient history stories as I could get my hands on.  I especially loved ancient Roman and Greek stories and would read them under the covers with my flashlight.  One story that I especially loved was that featured a monster called the Minotaur.   The myth recounts that King Minos of Crete at Knossos hired Daedalus, an architect, to construct a maze or labyrinth so elaborate that the beastly Minotaur, could not find his way out.  By keeping the monster caged, the king protected his subjects from certain death.  Eventually, the young hero, Theseus, shows up and disposes of the Minotaur.  He also escapes the labyrinth by following a golden thread back to entrance of the maze and gets rewarded, as all young heroes do.

Retirement planning can often feel like an intricate maze fraught with nuance and confusion.  In several of my previous blogs, I have referenced different concepts such as the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, Tax Free Savings Accounts, Open Accounts, and plain ordinary savings accounts.  Trying to get one’s head around all these programs and the nuances within each plan is enough to make your head spin. It’s no wonder that Retirement Planning and Investment planning can feel like King Minos’s labyrinth.

*One important decision that people must deal with is when to take their Canada Pension benefits.  The best decision can provide a lot of income to people, however many people leave a lot of money on the table, because they use outdated or incorrect information.  Here are some Outdated “Rules of Thumb” that are no longer appropriate when planning your Canada Pension Plan Income:

1.  Most people die in their 70’s
2. You need less income as you age
3. You will spend less in retirement in your later years
4. Managing financial risk means increasing allocations in cash and bonds as one ages

These outdated “rules of thumb” are based on former truths that are no longer reality but have survived and continue to be used today.

The best way to consider your Canada Pension Plan options is to consider two options.  The most common option that people are familiar with is the “Break-Even” model and the other is the “Lifetime Loss” analysis.  The Break-Even model assumes an early death whereas the Lifetime Loss analysis assumes a long life.  Given that most Canadians will live well into their 80’s or 90’s, it may make sense to consider deferring CPP beyond age 65 up to age 70.

This is very important because life expectancy increases with age. This is an actuarial phenomenon that I will try to explain this way. If a person lives to age 67, it is probable that the person will live another 15 years or to age 82.  If that same person makes it to age 82, it is probable that he/she will make it another 7 years or to age 89.  The reason that this logic works is because when young people pass away, death is primarily due to accidents.  As people get older, illnesses start to take people. So, if acute and chronic diseases pass you by or get cured, the probability of long life stays in your favour. 

Al’s Nuggets:

1.  Do the math!  Work with your advisor to work out the Break-Even model vs the Lifetime Loss calculation.
2. If you have worked in Canada between ages 18 and 70, you are eligible for the Canada Pension Plan.  How much you will get will depend on contributions during your earning years.  Check your “My Service Canada Account”! *

*From Notes “Improving CPP Planning for Canadians: Timing is Everything” FP Canada, Spring 2022. *

Retirement planning has been an activity that people in the Western economies have embraced for centuries. The first known admonition to “save for the future” that I found was in the Old Testament portion in the Bible. The author, King Solomon, wrote in Proverbs 6:6-11,

6) “Go to the ant, you sluggard; consider its ways and be wise!

7) “It has no commander, no overseer or ruler,

8)  yet it stores its provisions in summer and gathers its food for harvest.

9)  How long will you lie there, you sluggard? When will you get up from your sleep?

10)   A little sleep, a little slumber, a little folding of the hands to rest –

11)  and poverty will come on you like a thief and scarcity like an armed man.”

From the tone of King Solomon’s words, it seems like he was quite frustrated with more than a few of his subjects! Why would he be calling his fellow Israelites “sluggards?”  Regardless of why Solomon was calling his subjects lazy, he was dealing with an issue that has been a historical dilemma since before   970 B.C.

According to a course on the Canada Pension Plan that I just completed, Canada has an aging population. At age 60, average life expectancy for a male is 29 years and for a female it is 31 years. Other modern industrial countries like the United States, Britain, Israel, the European Union, and Japan share in this happy problem with us. This “problem” is the result of good diets, decent health care, quality education and modern tools that make our lives easy and comfortable.

In Canada, the retirement savings rates have not changed significantly over the past 30 years. This is because consumer spending and personal debt has risen at the expense of saving and investing. When one considers that most people enter the work force between age 18 and 26 and then retire after about 35 years, it is easy to see that most people will spend as many years in retirement as being employed.

Canada has had foundational plans for the benefit most low and middle-class Canadians since at least 1927. In 1952, Old Age Security was revamped and then in 1966, the modern Canada Pension Plan came into effect. Our Old Age Security plan is a universal social pension that is funded by our tax dollars whereas the Canada Pension Plan is funded by both Employer and Employee contributions through payroll deductions.

There are many moving parts to both plans which I will not get into due to space considerations. Suffice it to say, it is wise to consider the words of Solomon because the benefits from these two government plans will not keep middle class Canadians in the lifestyle to which they are accustomed. If you wish more details as to your own plan, check out your own details on the Service Canada website or send me a note. I will be happy to help you with a bit of education if you want to discuss this aspect of your retirement plan. The sooner you “go to the ant,” the better off you will be!

Al’s Nuggets

1.  While the maximum CPP benefit for the year 2021 was $1203.75/month, the actual average paid out was only $619.44/month! That is quite a gap and a real shock to many Canadians!
2. To maximize your CPP benefits, get your income over the Yearly Maximum Pensionable Earnings. In 2022, the YMPE is 64,900, and the 2023 amount will be published shortly.
3. Forewarned is forearmed!

I have always enjoyed participating in different sports throughout my life.  Some sports were easier for me than others but one sport that I could never master was waterskiing.  I learned about waterskiing just after I met my then future wife.  During the first summer in which I met my future in-laws, it was common to go the lake and enjoy the day boating and waterskiing.  Mom and Dad had a little boat, named Speedy Klemn, that had a 55 horsepower Evinrude engine. This boat was perfect for pulling my wife and her 2 sisters.  They could start skiing on a slalom board in the shallow water at the beach and be hydroplaning within seconds.  On the other hand, my first skiing attempts were more akin to plowing.  The problem with my water skiing was either the small boat or my large heavy frame.  Regardless of why there was a struggle, I eventually learned how to ski behind their boat and became proficient on two skis.

How does hydroplaning, while waterskiing, connect with financial planning?  Hydroplaning occurs when your skis begin to skim the surface of the water while moving at a high speed.  If you do not have enough speed, you sink.  Uncontrolled debt is akin to having to having an anchor around your waist that keeps you from enjoying life due to its burden on you.

In the September 7, 2022, edition of the “Investment Executive”, the firm Equifax Canada stated that “total consumer debt hit $2.32 trillion in the 2^nd Quarter of 2022”.  This is up 8.2% compared to the same quarter in 2021.  The article went on to say that “increases in new lending and higher spending linked to inflation helped boost non-mortgage debt to $591.4 billion, up 5.2% from a year ago”.   This article also went on to say that “credit card spending is reaching historically high levels”. 

The Bank of Canada has been raising its lending rates this year and is likely to increase its lending rates in the months to come. Banks, Credit Unions, credit card companies and other lenders will be passing those increased costs to us, the everyday consumer.  The upshot of this warning is that the cost of debt servicing is going up. 

Al’s Nuggets:

1.  If you are drowning in debt, grab a life jacket.  Your financial advisor, banker, accountant can be terrific resources.
2. Don’t be hard on yourself.  Use your energy for solutions, not blame.
3. Quit digging! 
4. Make it a family project!  Honesty, condor and a team approach can create clever solutions.  Children can be included.
5. Hold on to things lightly.  Selling off things that you don’t use often can be a good start.
6. Cancelling things like cable tv, and/or subscriptions are easy ways to find a few extra dollars to put onto the debt.
7. Eat at home.
8. Consider a side hustle or take more overtime if available.
9. All or some of the above!