Canadian investors have been following a variety of recent debates about the structure of the advisor/client relationship. I’m going to cut to the chase quickly.
If you seek core qualities and competencies from your investment professional, such as the following list, you need to conduct some research. Your mission is to find a way to hire a “discretionary” portfolio manager (DPM) for your ongoing wealth management needs.
“Sometimes it’s necessary to go a long distance out of the way in order to come back a short distance correctly.” — Edward Albee (1928–2016), American playwrightInvesting plans that pursue flavours of “sell in May and go away” are not vanishing anytime soon. Simply said, the catchy tune is about to ignite the annual rounds once again. Strategies that believe stock investing from November to April have better prospects than other months.
Keen followers of this practice typically sell their equities around May, such as stocks, mutual funds and ETFs. They then repurchase equity investments near November.
“I don’t recommend clearing the deck willy-nilly. Drastic actions are seldom wise replacements for long-term strategy.”
I’m fully on board with the excitement of getting away to a variety of travel destinations. That is the “go away” part. On the other hand, I just don’t buy into the questionable wisdom of selling the nest egg. For me, the “sell in May” part needs much closer scrutiny. Particularly, outlays of disposition and acquisition. Income tax implications also play a part.
Let’s be clear about the strategy. An investor unloads the entire portfolio, then acquires the new version a few months later. This process is repeated year after year, after year. Sounds like quite a heap of cash to shell out for transactions and tax implications.
Potential pitfalls
If only investing were that simple! Examining these pointers helps assess the prudence of wholesale selling: Continue Reading…
“Retirement: World’s longest coffee break.”Families are becoming increasingly concerned about achieving and maintaining their long term retirement goals. Some retirements will be in doubt. Others will fall short of the objectives. Having sufficient, reliable sources of funds is at the top of the worry list. Deploying a secure retirement plan spanning 20 to 30 years, often longer, is a demanding journey for many.
Planning for retirement remains a balancing exercise between providing for today and salting away a big enough portion for the later years. Sadly, not everyone gets it right. Hopefully, you will never have to face that dreaded realization. That is, you don’t have enough money to retire, or continue retirement, as planned.
“Most retirement concerns or mishaps typically surface after age 60.”
Someone who is broadly qualified should be in charge of stickhandling this exercise. Perhaps, someone who can take on duties of a “wealth pilot.” Extensive experience is desirable in navigating the nest egg through the myriad of temptations for making sudden moves. Logical decisions that place the family’s best interests first are a must. It also manages overreactions to daily headlines.
Canadian families rely on a combination of financial sources to fund retirement: personal savings such as cash, RRSP, RRIF and TFSA accounts. A variety of real estate properties contribute. Employer pension plan benefits are important to many. Government benefits typically include Old Age Security payments net of clawbacks and the Canada Pension Plan. The last two offer some flexibility as to when they commence. American families have their own assortment of registered accounts, such as 401(k) and IRAs, along with entitlements to Social Security.
Most retirement concerns or mishaps typically surface after age 60. This situation may pose a variety of difficulties to recover from. Some investing landscapes have been getting a little tattered of late. Continued low-return environments contribute to the dilemma.
What causes shortfalls
All retirements need to deal with several moving parts at once that develop along the roadway. I summarize some of the more critical reasons that affect retirement funding shortfalls:
Investors are wise to delve into the pressures of delivering long-term portfolio results. Most nest eggs receive little or no saving capacity after retirement begins. Think of this as having to rely only on investment returns, say for 30 years. That is both hard to imagine and accomplish.
In addition, emotional attachments to investments owned typically prevent portfolios from taking corrective actions in a timely manner. For example, investors hold onto loss positions far longer than necessary.
Any one reason, or combination, can abruptly slam the brakes on family retirement goals. You typically need to act quickly to rectify the setback in the making.
I suggest starting with a deep breath. Then proceed to methodically analyze and estimate the size of your retirement shortfall. Sketching a few “what if” scenarios should help your family identify and select the best ways to move forward.
Assess your options
“Don’t miss the donut by looking through the hole.”Many investors prefer access to plenty of information as they seek to achieve their goals, typically funding for retirement. Some even want a deluge of information. I thought it was instructive to have a closer look at this investing approach.
For example, last week investors were treated to making sense of 19 major economic data releases, such as jobs, factory orders and consumer credit. This week that number drops to a mere 15 releases, followed by another 17 and 15 for the next two weeks. And that list just covers the US economy! Heaven help those who also feel like tracking China, Japan or Europe.
More data will soon be on its way with the release of quarterly earnings and future prospects for a bevy of companies. If this feels like taking on a herculean task, you are right. So, let’s deal with the key question: “Do you allow the volumes of daily noise to influence your investing?”
First a candid observation. Investors are very keen to find facts, figures, data, trends, people, information and institutions that agree with their existing views. Then they proceed to ignore all the other people and data that contradict their beliefs and positions. This is commonly known as “confirmation bias.”
Few investors have the courage to disregard the massive daily volumes of research, predictions, data and advice readily available from many sources. Those savvy investors know it’s best not to react to short term distractions coming their way each and every day. Call it market noise, especially, during large market swings.
So, let’s deal with the key question: ‘Do you allow the volumes of daily noise to influence your investing?’
I learned long ago that having oodles of information at your fingertips is simply not required. One basic principle of successful investing is to ignore the daily avalanche of short term events. Investment experience will improve by paying more attention to your guiding principles.
Handling information excess
All investors display some level of confirmation bias. All of us believe we are open minded. However, the facts show that bias shapes the opinions we value. Yet, knowing about it and accepting that it does exist, helps make attempts to recognize it. That usually assists in seeing things from another perspective.
I suggest that adopting this approach is helpful: Remind yourself that markets are logical, while investors are emotional. Distractions of the day will tempt you to take your eyes off the ball. Hence, try not to get sidetracked.
Think of it this way. If you start the investing process at age 30, it takes roughly 30 years to accumulate your nest egg. That leaves the following 30 years to enjoy spending some or all of it. Perhaps, also pass some onto your loved ones.
These 30-year ballparks are far too long for you to be preoccupied with chasing bias that does not work. You need to recognize that having information at your beck and call contributes little to you becoming a better investor
I recommend that your main task is to start turning off the sources of daily noise as soon as you can. Once this is accomplished, that feeling of liberation settles in over the nest egg.
I’m keenly interested in how you turned off the taps. A note is appreciated. Thank you.
Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the investment and financial advisory profession in 1972. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971, then attended the University of British Columbia, graduating with the MBA in 1972. This blog is republished here with permission from Adrian’s website, where it appeared April 10th.
“Never spend your money before you have it.”
—Thomas Jefferson
I can’t emphasize enough that time is truly of the essence if you benefit from implementing this simple family lending practice. Interest rates are expected to inch up again and will alter the value of this tactic. Hence, I revisit the benefits of one of the few remaining family income splitting strategies.
It is commonly known as the “prescribed rate” loan. The procedure needs these components:
“The benefit of the prescribed loan strategy is a bigger family nest egg.”
Examine your family benefits from this income splitting opportunity. All loan arrangements and documentation must be in place by March 31, 2018 to derive maximum benefit. The key is to charge interest at least at the prescribed rate on cash loaned to a spouse/partner. That prescribed rate is now set at 1% for loan arrangements made by March 31, 2018.
The lower income spouse aims to accumulate a larger nest egg while the family pays less tax. The good news is that loans don’t have to be repaid for a long time, say 10 to 20 years or more.
My sample case highlights the income splitting strategy (figures annualized):
Prescribed Rate Loan – Sampler
Here is a simplified method to think of such loans:
Cash Borrowed at 1% rate: $200,000
Assumed Investment Income (4%): $8,000
Less: Prescribed Loan Interest (1%): $2,000
Taxable Income for Borrower Spouse: $6,000
Taxable Interest for Lender Spouse: $2,000
The benefit of the prescribed loan strategy is a bigger family nest egg. Your mission is to shift investment income into the hands of the lowest taxed spouse.
Need for speed
Today’s prescribed rate, which is set quarterly, is as low as it can be. However, it is most likely to rise at the next setting later this month. The prevailing expectation is a jump to 2% from the current 1% rate on April 01, 2018. Such an increase reduces the net value of the loan arrangement. Further, we may not enjoy a 1% rate for a long time, perhaps never again. Continue Reading…
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