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Posts from the ‘Investments’ Category

Covid Contemplations: What to Do If You Have Been Socially Distanced by your Finances

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In this eerie time of social distancing, medical mayhem and financial carnage, I feel like a background character in a cheesy made-for-tv movie starring B-grade actors from the 70’s. Unfortunately,  the chaos and risk are all too real, although the consequences and aftermath remain a riddle wrapped inside an enigma.

For those of you, however, who are trying make sense of their financial picture, I do have a few suggestions to lessen the financial pain and some things to keep in mind when you are deciding what to do next.

Consider Future Tax Issues When Making Your Financial Decisions Today

When reading some of the tax-planning options I discuss below, particularly those about harvesting capital losses, it’s also really important to consider how things might look a few years down the road when Covid19 is hopefully a distant and not particularly fond memory, like door-to-door salesmen and (fingers crossed) manbuns. I simply can’t imagine a future that doesn’t include significant tax hikes, particularly for those in the higher tax brackets or for most people in their year of death. I also worry if this might also include increasing the inclusion rate for capital gains from 50% or, for those of you not up on tax-speak, what percentage of any realized capital gains is actually included as taxable income and what part is tax-free. Keep in mind that this was something tax types were stressing about even before this all came down.

In the past, as much as 75% of capital gains were taxed on sale. If the inclusion rate goes to 75% again, this would mean paying 50% more tax on gains than we are right now! For example, if you had a $10,000 capital gain and were in the 40% tax bracket, you’d have to pay $2,000 in tax at the 50% inclusion rate ($10,000 x.50 x.40). If it goes to 75%, then you’re out of pocket $3,000 ($10,000 x .75 x.40). Hopefully, if the inclusion rate is increased, it’s not quite so drastic – I just used 75% as an example since it was a number our government had charged previously. Essentially, just like when setting any other tax rates, they can pick any number they want, limited only by the fact that they want to get re-elected and probably don’t particularly enjoy having their likeness burned in effigy.

A) Capital Gains

For those of you with unrealized capital gains from those bank stocks you bought in the days of disco, there are some planning opportunities available for you, particularly if you expect to be in a lower tax bracket than usual this year anyway.  Here are some of the reasons why you might want to trigger some of those gains now:

  • Your other sources of income are also affected this year and you’ll be in a lower tax bracket than usual. Although paying taxes ahead of schedule is not something I love doing, you might be better biting the bullet now vs. selling in a few years during the new tax reality. It also may also mean not having as much money in the market to capture any future market recovery and receive dividend payments if you have to divert some of your capital to pay the tax bill next year unless you have offsetting capital losses so consider this carefully. On the other hand, it’s not like you need to pay the tax bill today – this is a bill you won’t need to cover until April 2021.
  • You have other stocks that are underwater and would generate capital losses upon sale. You could apply those losses against those gains so you won’t have to pay the tax man this year and can keep all of your capital invested to hopefully participate in any recovery and generate income while you wait.
  • You have losses from previous years already on the books to use up so you won’t actually be triggering a tax bill. Triggering gains at the current inclusion rate, even if you aren’t actually paying any tax on them because of your offsetting losses, will still save you tax in the future if inclusion rates change going forward as I explain later in this article.
  • You are worried and were going to take some money off the table anyway.
  • Your portfolio wasn’t properly diversified, previously, it would have meant paying too much tax to rebalance previously. Now that values might have declined, that tax bill isn’t so high and the tax pain isn’t too great. Although you are selling when markets are down, you will also be purchasing your new investments at a discount. This works even better if you have some of those offsetting losses we also discussed.
  • Your risk tolerance has changed, or you no longer like your current mix of investments anyway.
  • Your capital gains are inside your company and you are really worried about the inclusion rate for gains increasing going forward. If this happens, corporate investors will suffer another hit. Our tax system allows companies to pay out the non-taxable portion of capital gains tax-free to its shareholders (i.e. currently the 50% that isn’t taxed). If the inclusion rate went to, say, 75%, then shareholders would only be able to take out 25% of the gain tax-free, which is half of what they can do now. When coupled with the higher tax rates we’ll likely be paying in general going forward, this might be enough incentive to lock in those tax-free payments now, particularly if the business owner isn’t making as much money from other sources that year anyway. If this might be you, then you might hold off on selling company-owned investments that have losses, as realized losses offset how much of the gains you can withdraw tax-free.
  • You are looking at other uses for your money, such as permanent life insurance, income-splitting it with a spouse or through a family trust, paying down debt or perhaps helping the children out a bit more now than you’d previously anticipated.

As a final point, it is also important to remember that if you do sell a stock that is in a capital gain position but you still love it, there is nothing that stops you from buying it back whenever your heart desires. Although you must wait 30 days after selling a loser before repurchasing it, there is no such rules when reconnecting with a former flame that you previously sold at a profit.

Capital Losses

When deciding whether or not to trigger capital losses, here are some of the things to keep in mind when making decisions:

  • If tax rates and the inclusion rate both increase in the future, triggering capital losses in later years to offset future gains might save you more money over time than triggering them now, particularly if you’re ultimately going to be in a higher tax bracket in the future anyway.

 We talked earlier about how the inclusion rate works for capital gains and how an increase of the inclusion rate from 50% to 75% would mean including $7,500 of every $10,000 capital gain as taxable income rather than just $5,000. The same is true for capital losses – if the inclusion rate was increased from 50% to 75%, this means that you get to deduct $7,500 per $10,000 of bad decisions rather than only $5,000.

It all comes down to when you trigger the losses. Typically, when inclusion rates are increased, those increases don’t apply to losses already on the books. For example, if you trigger a $10,000 gain in a dystopian future reality where inclusion rates are 75% but had an unused $10,000 capital loss on the books from this year, the two would no longer cancel each other out. Because you triggered the loss at a time when the inclusion rate was only 50%, you would only get to deduct $5,000 of that total loss of $10,000 but had to include $7,500 of the $10,000 gain as income, meaning you would still need to pay tax on $2,500. It’s always possible that the government could increase the inclusion rate for past losses if they decide to increase the inclusion rate for new gains. Personally, I think it’s more likely to find discount hand sanitizer  and toilet paper on sale next week than for that to happen.

  • If you want to trigger capital gains this year for some of the reasons discussed above, i.e. you’re going to be temporarily in a lower tax bracket and are okay paying some tax now at current rates, you won’t want to trigger any capital losses this year, as they have to applied against this year’s gains.
  • Triggering losses now will give you more flexible for rebalancing your non-registered portfolios going forward since you can apply these losses against future gains so that you can rebalance without tax consequences until those losses are used up.
  • You have some big capital gains from the last 3 years and want to carry back this year’s losses to get back some of last year’s taxes. You’ll have to wait until you file your 2020 tax return to do this, but it might be worth the wait if you were in a high tax bracket then and don’t expect to be in the same place going forward.
  • You adopt the bird-in-the hand approach and want to deal with today’s taxes and inclusion rates rather than guessing about how things might look in the future. Likewise, you might expect some of your losers to rebound and might want to just lock in the losses now for flexibility’s sake even if this means having more taxable capital gains in the future if your reinvested dollars make money.

As a final thought, it is important to remember that you,  your spouse, your company, etc. must wait 30 days to repurchase any investments you sell in order to be able to realize your capital loss. If you are still really bullish on the investment’s long-term future, then you could look at similar alternatives, at least until the 30 days have expired, unless you’re happy to sit on the sidelines for the short term.

Find Some Balance

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Somewhat ironically, some of my client’s biggest financial planning headaches a few weeks ago was not being able to rebalance their portfolios without triggering big tax bills. In many cases, this meant having a disproportionately large share of their investments in perhaps a few stocks that had been in their lives longer than their children.  Adding to the risk,  many clients owned several similar stocks in the same sector with the same problem, such as perhaps 3 or 4 Canadian bank stocks they’d first started acquiring when the first Trudeau was doing his thing.

All that has now changed. Although you may still love your BMO or Royal Bank shares, it may now be possible to trim those positions in favour of a new infatuation. It doesn’t mean abandoning all of those legacy stocks, but merely hedging your bets. Although playing the field is not a great recipe for romantic success, investing is an entirely different kettle of fish. Rather than just looking at the tax side of things, you might be better off focusing on building a properly diversified portfolio that fits like a glove even if it means cutting an extra cheque to Ottawa in order to make this happen.

If you are looking to rebalance, perhaps this is the time to add a few new types of investments to your portfolio, particularly:

  • some that don’t trade on the stock market and hopefully haven’t taken as strong a gut punch to their prices as public market stocks have suffered;
  • expanding your portfolio geographically beyond just Canadian dividend payers and some companies from down in Trumpland;
  • investments that offer some downside protect through options or the ability to short-sell or which are designed to allegedly make money in any market conditions, although this doesn’t always happen.

The current buzzword is that people should “invest like a pension” and strive for less risk and smoother returns by expanding their mix of investments. Although even pension funds or companies that invest like them have taken a kick to the teeth this last month, their extra levels of diversification have generally helped them some of those extra body blows that the average Joe has endured.

Look to Refinance Loans

For those of us with mortgages, one of the consolation prizes (albeit one on par with a getting a participation ribbon for finishing  58th place in a 5 km race) are much lower borrowing rates. If you have loans of any type, get professional advice regarding whether it makes sense to redo those loans at current rates despite any penalties that might apply.  For those of us with variable loans, the monthly savings can be really significant and will hopefully help ease the pain for years to come.

For those of us with family trusts and loans at 2%, start planning to refinance those loans at 1% this July, as it appears very likely that the minimum loan rate will drop back to 1% at that time.  This will also apply to spouse loans as well, so it’s worth looking at updating those too. Despite the hassle, it’s recommended that you actually physically repay past loans and then re-advance the funds.

This will allow more future investment income to be taxed in low-income family members’ hands and less in yours at your higher rates.

Consider Setting Up a Family Trust or a Spousal Loan

If the rates do drop to 1% in July (this will be clear by the end of April and is based on a government formula that suggests that this will happen with room to spare), then those of us with large unregistered investment portfolios have the opportunity to income-split a lot more successfully with spouses, children and other lower income family members. Noting the current yields on many investments and the hope of stocks eventually recapture some of their past glories, the tax savings from loans to family investment trusts or spouses are even more mouthwatering. Until now, the unrealized gains on the higher income spouse’s portfolios may have been a deal breaker, as it meant paying too much tax to free up the capital to loan to your spouse or trust. For better or for worse, this may no longer be the case, both because of reduced gains and perhaps if the higher income spouse is in a lower tax bracket this year.

Be Prudent If Investing New Money into the Market Today

Although current yields on many investments are (apologies to my vegetarian, vegan or pescatarian readers) as mouthwatering as prime rib on a cold winter’s day, there is still a lot of uncertainty in the market. Although it is a personal decision as to whether you wish to deploy any dry powder you may have to take advantage of these eye-popping yields, do keep in mind that we might not have seen the bottom and it’s hard to determine how the fallout will affect different stocks and industries. Consequently, you may wish to keep in mind some of the following if you’re contemplating dipping a toe back into today’s rather frothy investment waters:

  • Consider dollar cost averaging rather than trying to do market timing. We don’t know if we’ve hit the bottom so you may benefit from easing money bank into the market over a number of weeks or months rather than going “all in” on what your fortune teller says is your lucky day.
  • Yield is a wonderful thing. If you do want to put new cash into the market, take advantage of those high yields rather than counting on future gains. The income will reduce the risk and can be redeployed back into the market if you so desire or can be a way of providing more money for your family during a time when many family budgets will be stretched extremely thin. Because of the current calamity, even blue-chip stocks have yields formerly reserved for junk bonds. As a result, there is no need to travel too far down the risk spectrum just to get a few more percentage points when safer stocks are already paying you handsomely
  • Be sure that you have a sufficient contingency fund set aside to cover you and your family’s expenses so you’re not stuck having to sell some of those investments you just purchased at the worst possible time. If in doubt, bump  up the size of the contingency fund.
  • Be even more conservative if you are borrowing to invest. Although rates are astonishingly low right now, leveraged investing only works if you can pay back your loans when the time comes. Accordingly, think long and hard before proceeding and reread my last three bullets at least twice. I strongly suggest staying away from margin accounts at this point as a margin call might ultimately be the financial kiss of death. If you do borrow to invest, carefully investigate the spread between secured lines of credits and borrowing using a traditional mortgage. Despite the decrease in rates, there can still be a big difference in cost between borrowing using a HLOC or using a mortgage. Although the mortgage option is less flexible and requires you to also pay down some of the principal with each payment, it might still be the way to go.
  • Diversify, diversify, diversify. Because the fallout is still so uncertain, spread your money over many different sectors and investments. It’s better to take some of the risk off the table by hedging your bets. Rather than waiting for fair weather and your ship to come in, consider funding a fleet of smaller boats that will see you safely into the future even if some of them don’t ever reach the shore.

Look into Estate Freezes

An estate freeze is a strategy that involves owners of private companies swapping their common shares for fixed value preferred shares. New common shares are then issued to other family members or to a family trust and all future increases in company value will be taxed in their hands. Private business owners do this sort of thing this for a couple reasons:

  • To increase how much capital gains can be sheltered from tax if the business is sold. If the existing shareholders won’t be able to shelter all the gains from tax upon sale under their own lifetime capital gains exemptions, having new growth taxed in other’s hands allows these other family members to dip into their own exemptions to increase tax sheltering at that time.
  • To minimize the tax bill on their deaths by capping the value of their shares and transferring future growth to younger generations.

Despite not owning a private company, are you the proud owner of a non-registered investment or real estate portfolio that you want to pass along to your kids, grandkids or favourite financial planner? An estate freeze might still be the thing for you. Transferring those assets into your company on a tax-free rollover basis in exchange for fixed value preferred shares lets any future growth accrue inside a family trust or in your heirs’ hands rather than yours.  As a result, when your time comes, you can pass into the great beyond knowing that your final tax bill is a lot smaller and your heirs’ inheritance that much larger than might have been the case.

In most of this instances, estate freezes only work if the new common shares subsequently grow in value.  Accordingly, doing a freeze this year when share prices for most private and public companies are at Black Friday prices can mean tremendous tax savings in years to come if values do bounce back, particularly if tax rates and the inclusion rate are both higher in the future.

Learn About Your Options

Keep informed about government programs and tax changes that might help you and your family, such as EI, reduced RRIF withdrawal requirements, extensions to tax filing and installment payments, changes to your bank rates, mortgage or loan deferral options and so much more.


I am hoping that one day, hopefully soon, we can look back on today’s events in the same way many of us look back on 2008 and 2009 and perhaps how my parents viewed my teenage years – incredibly trying and stressful, but something we all survived and put behind us.  I’ve tried to give you a lot to think about but there are so many moving parts and uncertainty that this is probably a good time to get professional advice before taking any big steps. In the meantime, let’s just focus on being good to each other and realizing that we’re all in it together.

Volatility Part 2 – Enjoying the Merry-Go-Round Rather than Enduring the Roller Coaster


As I expressed in my last article, for retirees, volatility is a lot like that glamorous, thrill-seeking friend of your youth hated by parents everywhere: a lot of fun when things were going well, but prone to cause trouble, unreliable and, in the end, far more trouble than they were worth. In other words, the sort of thing we hopefully grow out of when we’re older and wiser.

In the world of retirement planning, unpredictability is like the common cold – unwanted, unpleasant and, although the symptoms can be managed, there is no real cure. Unless you’re unwilling to court other risks by investing exclusively in GICs or the like, volatility may be something you have to learn to tolerate, just like a runny nose. Any investment whose returns are not completely predictable, constant and guaranteed, requires accepting an element of unpredictability. Although this uncertainty can certainly work in our favour when the markets soar and our investments grow like a teenaged boy with an endless appetite, if we are already on track to live the retirement of our dreams before this unexpected bonanza, then these unexpected gains really won’t have benefited us too much. On the other hand, in order to get these large gains in value, it is usually necessary to court the risk of large losses instead. As I illustrated in my last article, unpredictable results that vary widely from year-to-year can turn your golden years into problem ones even if your so-called “average returns” are solid if the sequence of good years and bad years work against you, such as if you have some bad years early into retirement and are forced to liquidate savings for living expenses along the way before things pick up again.

Let’s look at this in a slightly different way and return to one of the basic lessons of mathematics – the shortest distance between two points is a straight line. This is also true for retirement planning. If you can use a straight line to illustrate your portfolio’s investment returns each year (which means earning exactly the same amount each year), it is pretty easy to predict the outcome if your other variables also toe the line. Unfortunately, life doesn’t work like that – instead of a constant 6 or 7% per year, returns will be inconsistent and the straight-line of our dreams will be replaced with something that may more closely resemble the random scratchings of a 3-year-old. On the other hand, although we may never be able to get that ruler-straight line, we may be able to organize our investments so that this line goes up and down in gentle hills and valleys, never straying more than a few percentages from the targeted average, rather than the wild peaks and troughs that indicate huge gains and losses that more closely resemble a mountain range. Put another way, we want to reduce the yearly, unpredictable fluctuates in portfolio returns or its volatility as much as possible, as the closer each year’s actual returns are to the portfolio’s average return, the less likely we will run out of money when we need it most. Thus, although the sequence of returns is vitally important, we can minimize their impact by reducing the overall volatility of our portfolios so that the bad years are hopefully never bad enough to scupper all our retirement plans, regardless of when they occur.

In order to illustrate this mathematically, I wish to borrow from some projections prepared by Newport Private Wealth¹, a firm that manages money for many high-net-worth clients across Canada and with which I have a referral arrangement. They tracked two investors, each with $2,000,000 portfolios and 7% average returns. Each withdrew $80,000 per year and experienced 2% fixed annual inflation and needed the money to last for 25 years. In fact, the only real difference between the two portfolios was the degree of volatility. One portfolio had 5% volatility (i.e. each year’s return was between 2% or 12% while still averaging 7% overall) while the other had 20% volatility (each year’s return was no less than -13% and no more than 27% while still averaging 7% over time). Newport then used something called a Monte Carlo Simulator to randomly vary investment results each year each portfolio within the ranges specified above within a normal probability distribution, while preserving an overall average return of 7% to see if each portfolio could pay out the full $80,000 plus inflation for 25 years. And they did this not once but 5,000 times. The results? The investor with the higher volatility had a 27% chance of running out of money while his more conservative counterpart reduced this risk to virtually 0%.

Think that 20% volatility is excessive? Think again. The TSX essentially had a volatility of over 22% over the last 5 years. While the investor with the 20% volatility would have also had scenarios among the 5,000 random projections that produced well more than the $80,000 plus inflation needed for retirement, (such as if there were several years of good returns early in retirement) you would need to ask yourself whether this extra gravy on top of a plate that is already full is also worth taking a 27% chance of running short of groceries.

Managing Volatility – What You Can Do

Assuming you have now decided to forsake the rollercoaster-like peaks and troughs of high volatility investments, how do you make this happen? If you wish to ride the low volatility merry-go-round, with only gentle rises and falls in investment returns, there are a number of steps you can take. Although there may be no single silver bullet, either working with the right investment professionals or taking some or all of the following steps yourself can take some of the guesswork out of retirement planning. Moreover, it is also important to realize that portfolios are not merely high or low volatility – there are an endless number of points between these two extremes. Thus, even if you are unable or unwilling to take all the steps listed below (as well as some of the others out there) to minimize volatility in your investing, you may at least want to turn down the volatility dial a little bit – as many investment professionals will tell you, it is actually possible to set up a portfolio with higher average returns while also taking some of the volatility risk off the table. Interested? Keep reading.

Controlling Correlation and Diversifying

One way of controlling overall portfolio volatility is owning different investment classes that don’t react the same way when experiencing the same market conditions. In other words, you are looking for investments that may actually rise, or at least hold their own, if all your bank stocks tumble so that the net effect to your portfolio isn’t as dire. Expressing this in investment-speak, if two asset classes are “positively correlated”, it means that they respond similarly to changes in the stock market. If their degree of correlation is 1.0, it means that they respond exactly the same way. If they move exactly opposite to each other, their correlation is -1.0. If their correlation is 0.0, however, there is no connection at all to their annual investment returns. Thus, if you want to protect yourself from unnecessary ups and down, you generally don’t want a lot of assets classes that have a strong positive correlation. On the other hand, a strong negative correlation is a wonderful thing while owning classes or sectors that are uncorrelated is also very useful.

Many investors believe that they are properly diversified by owning a mix of stocks and bonds. Unfortunately, according to another Newport study², people aren’t as protected as they may think. In fact, an 80% U.S. equity and U.S. bond 20% bond portfolio had a 1.00 correlation over essentially a 10-year period ending in December, 2015, while a 50/50 mix generated a strong .97 correlation and even a 20% equity, 80% bond portfolio had .64 correlation. Thus, even if you held mostly bonds (which I do not generally recommend), your bonds wouldn’t have helped you over that ten-year period if the market tanked.

Accordingly, the first step is ensuring that you diversify outside of just one country. For Canadians, this is also important because we don’t have a lot of Canadian options for some of the other different investment sectors, such as high tech and pharmaceuticals, in the first place. Secondly, I also suggest looking outside the world of publicly traded-stocks and bonds, as they certainly aren’t the only game in town, even if the banks and their mutual funds may lead you to believe otherwise. Some additional options to investigate are private infrastructure projects, private debt, investing in private companies, owning private real estate funds (as well as potentially your own investment properties in some cases). Quite simply, there are a lot of other ways of investing your money than through public stocks or bonds. By doing so, you can lower your portfolio’s overall volatility because of a weaker correlation between these alternative investments and public ones, in addition to the fact that many private investments have a far lower overall volatility in the first place. In addition to investing through an exempt market advisor, such as through Klint Rodgers of Pinnacle Exempt Market Dealers (another referral partner of mine), clients can often also get exposure to alternative investments through private wealth management companies such as Newport.

There are other risks for different types of investments – again, there is no silver bullet out there – but by minimizing your risk to any one type of risk, even if it means taking on some different types of risks with part of your portfolio, you are still increasing the chances of overall success, provided you diversify intelligently. Although diversification can be a lifeline for your retirement dreams should the public markets crash, it only works if your alternative investment choices are sound ones. Although there are many private market investments that I love, there are also others that I wouldn’t touch with a ten-foot pole.

Be a Beta Blocker

Besides constructing a public equity stock portfolio that includes a diverse mix of investments from different sectors and parts of the world, the volatility-adverse investor may also wish to narrow his stock picks to those boring, solid, mature businesses that have a strong record of consistent earnings. Although those companies won’t do as well during the good times, they won’t suffer as much when the sky is grey, which is far more important when investing during retirement. In other words, blue chip stocks are probably a better choice than shares in that junior gold stock you heard about in the golf course lounge. They even have a stat that tracks how much a stock moves up and down relative to the stock market as a whole, which you may wish to investigate called “beta.”

A stock with a beta of 1.0 moves up and down with the same volatility of the stock market to which it belongs, while one with a beta of 2.0 moves up or down twice as much as the stock market. On the other hand, a stock with a beta of only .5 would only suffer 50% of a market’s losses but would only reap 50% of its gains. For example, if the market went up by 10% in one year, a 1.0 beta stock would generally also increase in value by 10%, a 2.0 beta stock would grow by 20% and a .5 beta investment would increase by 5%.

It is also possible to have negative beta stocks, or those who move in opposite directions to the market as a whole. Using the previous example of a year when the market grew by 10%, a -1.0 beta stock would shrink by 10%, a -2.0 beta stock would decrease by 20% and a -.5% beta pick would decrease by 5%. Accordingly, building on the previous section and the goal of setting up a portfolio that is properly diversified, using both low beta stocks, as well including some that do well when the market as a whole suffers both make sense. Unfortunately, as investment types like to say, past results do not guarantee future performance. This also applies to beta. Stocks with a low beta to date may slowly grow riskier or those that were high beta in their start-up phase may become a lot safer once they have both feet firmly planted. This both means that using beta to set up a portfolio is more of a guide than a guarantee and that it is necessary to continue to track a stock’s beta over time.

Show Me The Money

One of my favourite ways of minimizing volatility is to own investments that pay me as I go. I suggest this for several reasons. First, during retirement, the more income you receive from your portfolio each year, the less capital you will need to liquidate in order to fund your lifestyle. As one of the biggest investment risks during retirement is being forced to “sell low” in order to pay for that week’s groceries, more income means more time for the rest of your portfolio to bounce back during those inevitable recessions.

Secondly, I’ve found that more income means less worry for most clients. The more income they generate, the less they worry about market ups and downs, as growth isn’t as important. This is also one of the other reasons I love private market investments – they can often pay out substantially more than most public market investments.

As an aside, although exempt market exemptions may be considered high risk – and this is certainly true in some cases – I have a hard time accepting that such a diverse array of investment offerings all have exactly the same risk profile. I prefer to think about private offerings in the same way as I view public market investing – each needs to be judged on its own merits. Although there are some that I would never touch, I am far more comfortable with many private market investments offering regular, significant income payments to investors with a sound business plan, a sterling track record that has been vetted by outsiders and which is structured to align its interests with its investors than with many public stocks.

Returning to the public market, those same blue chip stocks discussed previously also often pay out handsome dividend streams, which can be tax-advantaged for investors in the right tax brackets who aren’t worried about OAS clawback. Finally, if you haven’t heard of MICs (Mortgage Investment Corporations) and REITs (Real Estate Income Trusts), then I suggest taking the time to learn more about both. These investments can generally pay out significantly higher yields than many dividend payers and may provide diversity. Both are real estate plays. They can be investments that trade on the public market or private investments. They may be Canadian investments but it is also possible to own US real estate in Canadian REITs as well. Moreover, REIT also vary according to the type of real estate owned in addition to geographically. For example, there are REITs that invest in: apartment buildings, office buildings, industrial buildings, retail properties and retirement homes. As an added bonus, many REITs are able to pay out some or all of their distributions as “return of capital”, which is tax-free until you’ve received all of your original investment back, although it will probably mean paying more capital gains tax later when you sell your REIT.

I also like using Options as a way of both protecting portfolios from sudden crashes in value and to also generate extra income during times of higher volatility. Although many people seem to automatically assume that Options mean taking on higher risk and volatility, this is not true. Although there are some pretty high risk Options strategies circulating through the investment world, Options can also be used to take volatility off the table. I particularly like using “covered calls” (as I have written about previously) which involves selling some of the potential upside on stocks you already own over a stated period, in exchange for cash on the barrel now. Although you may miss out on some of the run ups in value in the good times, you increase your cash flow, which decreases your overall volatility and the chances of having to sell capital during a down market. The amount you can receive for selling some of the upside varies according to market conditions. These payments, called “Options Premiums”, are actually the highest during periods of high volatility. If you want to know more about this, I suggest talking to Thomas Tsiaras of Industrial Alliance Securities Vancouver, who does this for me and some of my clients, as most brokers do not offer their clients Options strategies.

On a final note, Options can also reduce volatility by minimizing your downside if you want to purchase this protection on all or some of your portfolio. This may be particularly valuable when investing in more volatile stocks or when you are worried about the market being overvalued but not wanting to convert your portfolio to cash in case you are wrong. Buying Call Options provides you with the right to sell stocks at a set price regardless of whether the actual trading price at that time is less than this value, thus capping how much you can lose on that stock since you can always sell at the call price if things are dire

Ultimately, while I believe that yield is your friend, it is only part of the mix when making investment decisions. While there are investments with significant yields that may be ideal for the right investor, a high yield can also be a potential warning sign in other instances. In other words, there might be a reason why a publicly traded stock is paying 10% per year, such as a recent fall in fortunes or the expectation that it will have to cut payments, or why a private market investment pays out so much.


Although volatility can make the good times better, it also means increasing the chances of life going horribly wrong. Although many of us focus solely on average rates of return, this rather misleading statistic paints a far from complete picture as I hope I hammered home in my last missive. In order to make an informed decision, it is essential to know the risks you need to take in order to get this return and how this may affect your retirement dreams. If your goal is to live, enjoy a secure, stress-free retirement that provides you with the best chance of success, then taking steps to minimize volatility should be a key part of this plan. The retirement you save just may be your own.

¹. Newport Private Wealth ( What the Smart Money Knows whitepaper, January 2016.)

². Newport Private Wealth ( What the Smart Money Knows presentation, January,2016).


Capital Ideas – How to Get the Biggest Benefit From Those Unwise Investment Decisions that Produce Capital Losses

Have you ever made any investment decisions that you’ve lived to regret? Unless your last name is Buffet or Graham (and even so, I still have my doubts), you’ve probably purchased at least a few investments that still cause you to stare into space while ruminating on how much money you lost. Moreover, unless you are content to live with GIC investments that currently pay less than the cost of inflation net of tax or have mastered the art of seeing into the future, there is a pretty good chance that you’ll have additional mistakes to lament over in the years ahead. Read more

Disaster on the Back of a Napkin

General News

Before diving into the topic of this month’s newsletter, I wanted to pass along a few other tidbits. First, I have two webinars coming up rather quickly. First, I am presenting at the World Money Show in Toronto this Saturday at 1:45 local time (10:45 in the fair place I call home), although this will be available via webinar. If you want to learn a little bit about how trusts work and hear of a few examples of their uses, then load up on the latte and tune in via the following link: If you aren’t able to attend or this doesn’t get circulated before then, I suspect a recording will soon be available and I will try to link it to my website Read more