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SEPTEMBER 2018
SPECIAL FEATURES How To Talk To Your Aging Parents About Estate Planning BTSX – Then, Now, And In The Future - Part 2
Darren Farwell 6
David Stanley, Ross Grant & Matt Poyner 8
How Business Owners Can Reduce Their Corporate Tax Bill Despite New Federal Budget
Rino Racanelli 11
Buying Stocks Is Not The Default For Investing
Aman Raina 14
The Art Of Portfolio Building
Ken Smith 16
The End Of Cheap Money Is Not Around The Corner And Why ‘There Is No Alternative’ To The Markets
Allan Small 18
A Little Bit Of Financial Planning Knowledge Can Go A Long Way John Kalos 20 Tax Smart Retirement Funding – Asset Mix Decisions It Seemed Like A Good Idea At The Time Charlie Munger’s Story Applies To Some Canadian Stocks
Ross McShane 21
Richard Morrison 24
Millennial Investing - Part 2 Fall In Love With Your Finances
Barkha Rani 27
Peter Hodson
CONTRIBUTING EDITORS: Ed Arbuckle, Margot Bai, Robert Barney, Dan Bortolotti, Ian Burns, Bruce Cappon, John De Goey, Donald Dony, David Ensor, Ken Finkelstein, Derek Foster, Benj Gallander, Robert Gibb, Andrew Hepburn, Shelley Johnston, Robert Keats, Cynthia Kett, Ken Kivenko, Camillo Lento, Marie-Josée Loiselle, Alan MacDonald, Brenda MacDonald, Gina Macdonald, Robert MacKenzie, Ross McShane, Ryan Modesto, Caroline Nalbantoglu, Tim Parris, Peter Premachuk, John Prescott, Kyle Prevost, Brian Quinlan, Wynn Quon, Rino Racanelli, Colin Ritchie, Scott Ronalds, Norm Rothery, Stephane Ruah, Allan Small David Stanley, John Stephenson, Brian Tang, Angelo Vicere, Becky Wong. MEMBERSHIP RATES: All rates for Canadian residents are printed on the inside back cover. Non-residents of Canada may purchase the online edition only – at $26.95 for one year’s service. Canadian MoneySaver (CMS) is published by The Canadian Money Saver Inc., 470 Weber St North, Suite #104, Waterloo, ON N2L 6J2 Tel: 519-772-7632. Office hours: 9:30 am to 1:30 pm EST Website: http://www.canadianmoneysaver.ca E-mail: moneyinfo@canadianmoneysaver.ca Canadian MoneySaver publishes monthly with three double issues (July/Aug, Nov/Dec and March/April). Canadian MoneySaver is an independent, totally membership-funded magazine. The information contained in Canadian MoneySaver is obtained from sources believed to be reliable. However, we cannot represent that it is accurate or complete. The views expressed are those of the writers and not necessarily those of The Canadian Money Saver Inc. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any securities or commodities. Canadian MoneySaver is distributed with the explicit understanding that Canadian MoneySaver, its publisher or writers cannot be held responsible for errors or omissions. Shareholders of The Canadian Money Saver Inc, editors and contributors may at times have positions in mentioned investments/securities. Copyright © 2018. All rights reserved.
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H
ere at MoneySaver, we have a mixed view of takeovers of companies. On the one hand, a takeover of a company is (usually) done at a nice premium price, and if you own stock in a company that is taken over, you can get a nice quick investment gain. No one should complain about a profit, right? However, often companies are taken over because they are good companies, with solid growth prospects. One can never know, but we bet that many companies would have done much better than a 40%, 50% or even 60% takeover premium--longer term--had they been left to grow on their own as public companies. Look at Illumina Inc. (ILMN on Nasdaq), one of the rare occurrences of a company successfully fighting off a takeover attempt. In 2012, Roche offered $51 per share for the company. Illumina successfully fought this off, convincing shareholders their company was worth more on their own. They were very right: the stock is now $330. Why bring this up? Well, we have seen a rash of takeovers and takeover attempts of Canadian companies this past summer, at a time when things are supposed to be quiet. We thus expect the fall to heat up with even more takeover activity when everyone gets back to work after the summer. When you own shares of a company that becomes a target, remember that you, as a shareholder, get a vote in the takeover. Don't assume it is always a done deal. Read the takeover circular carefully. Maybe, just maybe, you will make more money without the takeover.
902-569-3601
4 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z SEPTEMBER 2018
Peter
Peter Hodson
MoneySaver DIVIDEND& COMPANY NEWS In this column we list recent news, events, dividend income news and any other relevant information for MoneySavers. News items are those received after our last publication date. • Capital Power (CPX) raises dividend by 7%
• Facebook’s stock (FB) $120B market decline is the largest one-day drop in US history
• Husky Energy (HSE) raises dividend by 66%
• Agt Food and Ingredients Inc (AGT-T) get go private
• Alimentation (ATD.B) raises dividend by 11%
offer for $18 a share
• Empire Co. (EMP.A) boosts dividend by 4.8%
• Air Canada offers to purchase Aeroplan from Aimia
• Corus Entertainment (CJRb) cuts dividend by 79%
(AIM.TO)
• Boralex (BLX) raises dividend by 4.8%
• Brookfield Infrastructure (BIP) buys Enercare (ECI)
Canadian MoneySaver MODEL ETF PORTFOLIO SYMBOL
CATEGORY
PRICE
# OF UNITS
iShares 1-5 Year Laddered Corporate Bond
CBO
Fixed Income
18.26
506
9,239.56
6.5%
iShares DEX Universe Bond
XBB
Fixed Income
30.38
166
5,043.08
3.5%
iShares S&P/TSX Canadian Preferreds
CPD
Fixed Income
14.22
460
6,541.20
4.6%
ETF
TOTAL
% OF PORTFOLIO
iShares S&P/TSX Capped Composite
XIC
Equity: Canada
26.10
980
25,578.00
18.0%
iShares S&P/TSX Cdn. Div Aristocrats
CDZ
Equity: Canada Div.
26.36
613
16,158.68
11.3%
iShares U.S. High Yield Bond Index ETF
XHY
Fixed Income
19.16
350
6,706.00
4.7%
Vanguard FTSE Emerging Markets Index
VEE
Equity: Emerging
34.33
194
6,660.02
4.7%
Vanguard FTSE Developed Europe All Cap
VE
Equity: Interntional
29.77
304
9,050.08
6.4%
SPDR S&P 500
SPY
Equity: U.S.
281.33
29
10,610.22
7.5%
Vanguard Div. Appreciation Index
VIG
Equity: U.S. Div.
106.38
74
10,237.69
7.2%
iShares Russell 2000 Growth
IWO
Equity: U.S. Growth
207.55
45
12,146.34
8.5%
BMO Covered Call Utilities
ZWU
Equity: N.A. Div
12.88
437
5,628.56
4.0%
Vanguard Information Technology Index
VGT
Equity: U.S
186.16
27
6,536.73
4.6%
Consumer Discretionary Select Sector SPDR
XLY
Equity: U.S
111.27
43
6,222.39
4.4%
Cash
Cash
Cash
6,034.24
4.2%
Total Portfolio Exchange Rate Inception value: Inception date:
142,392.79 1.30
$ Gain/(Loss):
42,392.79
100,000.00
% Gain/(Loss):
42.39%
October 18, 2013
% Annualized:
8.77%
Prices are at market close on Jul 31, 2018. Individual prices are in USD$. Portfolio values, $Gain/(Loss), % Gain/(Loss), % Annualized all reflect USD$ values are converted to CAD$ CURRENT NOTES: none OTHER NOTES: Keep in mind all investors are different. This portfolio is designed as a guide in setting up your own personal portfolio. Unique considerations and adjustments need to be made to reflect your personal situation. Please perform your own due diligence before making investment decisions. For use by Canadian MoneySaver subscribers only. Not for redistribution. Please direct portfolio questions to moneyinfo@canadianmoneysaver.ca
Canadian MoneySaver z https://www.canadianmoneysaver.ca z SEPTEMBER 2018 z 5
Life Insurance
How To Talk To Your Aging Parents About Estate Planning Darren Farwell
C
anadian seniors are living longer and more independently than ever before. In 2016, there were over three-quarters of a million (770,780) people aged 85 and older living in Canada. This segment of the population grew by 19.4% from 2011 to 2016, nearly four times the growth rate for the overall Canadian population over the same period of time. (Source: Statistics Canada) Not only are older Canadians living longer, they are also holding significant wealth later in life. There are 2.5 million Canadians over the age of 75 with a combined total net worth of $900 billion. Over the next decade, their children—the baby boomers— will inherit approximately $750 billion, representing the largest intergenerational wealth transfer in Canadian history in such a short period of time. That’s a lot of money exchanging hands from one generation to another. And yet, because estate planning is often considered a delicate and taboo subject, many families have not had crucial conversations about how that transfer of wealth will occur, or other estate and incapacity planning topics. In fact, only 43% of baby boomers polled have talked to their parents about end of life care, finances and estate planning. As sensitive or difficult as these topics may appear to be, it’s vital for both elderly parents and their adult children to ensure there’s a well-conceived plan in place that addresses the details of eldercare, financial support and estate planning. Here are some ideas to start the conversation.
Talk about a friend’s experience Perhaps you have a friend whose parent(s) recently passed away where there wasn’t a plan in place. It may be beneficial for your parents to hear how difficult it was for your friend to finalize the distribution of their
parents’ estate if they had to scramble to find important documents or had to deal with an out-of-date will.
Share your own experience Share what steps you have taken in your own estate planning and invite your parents to offer their perspective. If you just purchased life insurance, ask your parents’ opinion as to whether they think it’s enough coverage or the right policy. Perhaps your financial advisor has asked you to do some retirement goal-setting. Ask your parents for advice about what they did when they were setting their own retirement plans. Based on their experience, invite them to share some of the top things you should consider. Hopefully, it will get them to share their actual plans with you.
Focus on your parents’ wishes, not your own Keep in mind that it’s not about what you think is best; it’s about ensuring that you can fulfill your parents’ wishes. The quickest way to shut down a conversation is to start passing judgment on your parents’ plans or lack thereof. Try to avoid questions with the potential to put your parents on the defensive: “Why are you doing that?” “What about me?” The challenge with these types of questions is that they can be perceived as being judgmental and interrogative. Questions such as these could result in your parents stopping the conversation.
Bring the key decision-makers together Ideally, all key family members should be mutually invested in the outcome of your parents’ estate plan. If you have siblings, ask for their input before you speak to Mom and Dad. The more you can engage and involve key members up front and make sure you’re all on the same page, the fewer chances there will be for family strife and disagreements later.
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Listen more You should spend more time listening than talking with your parents about their estate plan. Your goal is to encourage your parents to speak freely and honestly about their planning, or lack thereof. Try to avoid focusing too much on the numbers. Rather, focus on the over-riding principles. Do they want to stay in the family home or move to a small condo or retirement home? If there is a vacation property, do they want to keep it in the family? Are there any charities or causes they support where they might want to leave a significant contribution from their estate? As their care needs become more complex, do they have any ideas how they want them to be addressed? There are lots of details to consider, and it’s important to get as much input from your parents as possible to ensure their plan addresses their current and future needs.
Guiding principles for conversation The most important things to do are to reserve judgment, be a great listener, and keep the lines of communication open. All your questions likely will not be answered during one conversation. Instead, you want to create a foundation for open, honest and ongoing conversations so you can help your parents finalize a concrete plan.
The costs of not talking I’ve witnessed couples who have a solid financial plan in their twilight years and couples who don’t. The difference between the two can be dramatic. A poorly conceived or non-existent plan can tear families apart upon the death of the parents, as family members fight over heirlooms, or the family cottage because they can’t
pay the property taxes. At very least, it can cause undue stress and confusion as you try to figure what your parent or parents might have wanted. As difficult or awkward as it may be, it’s much better to have the conversation before your parent or parents suffer a major or fatal health crisis and they’re not able to advocate for themselves, leaving you and other family members scrambling to put everything in order. Just as your parents no doubt talked to you about money and finances when you were younger, it’s time to return the favour to ensure they are well prepared, well protected and can enjoy their twilight years confident that their care, wishes and legacy are in good hands. Darren Farwell is a Senior Wealth Advisor and Director, Wealth Management with The Farwell Group at ScotiaMcLeod®, and an Insurance Advisor at Scotia Wealth Insurance Services Inc., both members of Scotia Wealth Management™. You can follow Darren on Twitter @ DarrenSFarwell or visit his website at www.thefarwellgroup. com.
Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc.
Canadian MoneySaver FORUMS! Are you looking for single share DRIPs, information on taxes, equities, or just savings in general? Join our forums to get in contact with other like-minded Canadian MoneySaver subscribers. Visit the forum link at www.canadianmoneysaver.ca/forums Canadian MoneySaver z https://www.canadianmoneysaver.ca z SEPTEMBER 2018 z 7
Beating The TSX
David Stanley
Ross Grant
Matt Poyner
BTSX – Then, Now, And In The Future – Part 2 –
T
his is Dave Stanley, back with Part 2 of our article to share with you some great results from our BTSX experiment and mention some changes the column is undergoing.
While BTSX is a passive investment method, meaning that stocks are chosen solely on the basis of their dividend yield, the index components are selected by humans and mistakes can happen. Fortunately, there is a tendency towards the use of capped indexes. Thus, the S&P/TSX Capped Composite Index includes all constituents of the S&P/TSX Composite Index with relative weighting of each constituent capped at 10%. Now I am going to turn this column over to Ross Grant. CMS readers were very fortunate that Ross agreed to carry on with the BTSX experiment after I retired and his results have been excellent. I had always viewed the BTSX methodology as more a set of suggestions rather than rules and Ross introduced some badly needed changes that further adapted the process to the Canadian market. Thanks Ross! I first read one of David Stanley’s BTSX articles in 1996. I thought it sounded like a promising strategy, but I wanted to witness the results over time before committing any funds to it. I am sure that this has been the case for many of you over the years. After 4 years of BTSX articles, I finally started with a small investment. By 2007, I had moved the majority of my investments over to BTSX and the similar Dogs of the Dow Strategy. That year, my wife and I retired at age 43, believing this
strategy would provide the returns we needed to maintain our lifestyle over the long-term. I wanted to be confident that we could maintain the same lifestyle into retirement as pre-retirement. I knew if the strategy didn’t pass the test of time, we would always have the option to return to work. After surviving the financial crisis by riding the stock market down and then back up again, I was much more convinced that BTSX would produce the results we needed for many decades to come. It occurred to me that someday one of my children would ask, “How did you and Mom retire so early?” In 2014, I decided to capture our story by writing an e-book to share the practical application of the BTSX strategy. That year, David asked me if I would like to take over writing the BTSX annual articles and over the last four years I have issued the results and new annual stock lists. My goal was to detail the BTSX strategy and how it could be applied to help readers obtain the goal of financial independence. I made a couple of modifications to BTSX with David’s blessing. First, I moved the end date of the calculations to Dec 31st to coincide with the end dates for annual returns of major indices, making results easier to compare. The second change I implemented was a rule to sell a stock immediately if there was a dividend cut. The stock would be replaced with the next stock on the BTSX list that I recalculate on the date of the dividend cut. I watched too many dividend cutting stocks produce poor results for many years after that first dividend cut.
8 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z SEPTEMBER 2018
Below you will see the results of my last 17 years. Beating the TSX returns vs. the index (%) 2000 - 2017 Avg. Yr. Total Return (%) Portfolio Outperformance
Portfolio
Index
12.00%
8.5% 42.0%
The 12% average total return was similar to David Stanley’s results. If an investor is able to continue to generate this rate of return over the long-run they should be quite happy. Having met my objectives for writing the BTSX articles, I have decided to focus on other hobbies and increased travel. I will be passing the BTSX torch along to Matt Poyner whom I was introduced to after reading several of his CMS articles. I was impressed with his advice and felt compelled to contact him. We have exchanged several emails over the years and recently met for an informative and enjoyable lunch together with David Stanley. I am sure Matt will have much to share with you in the coming years. Here are some investing tips that to leave you with that I found extremely important: 1. Closely manage the spending of your money on the necessities in life so you will have more funds available for discretionary spending. 2. Minimize your investment costs, like MERs, as much as possible. If you engage financial advisors, ensure they are choosing funds with the lower costs. Better yet, invest on your own if you are interested and able to eliminate MERs completely. 3. Minimize your income taxes. Investing for dividend income and capital gains will leave you with more after tax dollars than earned income or pension income. 4. Focus on dividend-paying stocks. These companies tend to be well established and have a philosophy of returning profits to shareholders in the form of dividends. 5. Understand the impact of inflation on your investments. It is important to realize that a portion of all your investment returns must be reinvested to cover the impact of inflation. This will allow you to maintain purchasing power. If inflation is 2%, then your portfolio must be 2% larger the next year to generate income with the
same purchasing power as the previous year. The negative effect of even a small rate of inflation over decades can be devastating to an investor, if not planned for appropriately. 6. Aim to live on 4% of your retirement portfolio to improve the odds of not outliving your money. This has worked well for us. 7. Have a disciplined strategy that will allow you to buy low and sell higher. Your strategy should have a good long-term track record. BTSX was my choice and I plan to continue to use it. Don’t rely on your emotions to make the right calls at the right times. Hopefully you have benefited from the knowledge I have shared, as much as I have benefited from sharing it with you. Remember that the markets will rise and fall and eventually rise again. Our financial prosperity is far more dependent on our long-term results over decades rather than the impact of a single good or bad year. Focus on the long term! Now Matt Poyner has some thoughts on the future of Beating The TSX. There is something deeply gratifying about seeing an underdog succeed: David and Goliath. Rocky Balboa. Harry Potter. When it comes to investing, we are all underdogs. Our brains are wired to hoard berries and run from tigers, not to comprehend complex systems and plan decades into the future. So, isn’t it amazing that average people can and do succeed as DIY investors?! Much of the financial industry is designed to encourage the learned helplessness of the retail investor but thanks to resources like the Canadian Moneysaver, there is a growing faction of rogue individualists determined to do it themselves - and to do it right. David Stanley and Ross Grant are two of those people. Without formal training in finance or investing, they managed their own investments so successfully that they became mentors to many others, including yours truly. How did they do it? They had no market-timing insights. They had no special skill at picking hot stocks. What they had was a plan. The truth is that there are a lot of effective investment
Canadian MoneySaver z https://www.canadianmoneysaver.ca z SEPTEMBER 2018 z 9
strategies out there— there is no “one size fits all” solution. For some people, the only way they are going to sleep at night is to have a financial advisor taking care of everything for them. Fair enough. For others, the sound rationale of investing in index ETFs makes it the only way to go. Great. But there is another way. Ten years ago, when I was a relatively new investor wading through the bewildering array of “expert” opinions and hot stock tips, I read an article that immediately stood out from the rest. Not only was it published in a magazine devoid of ads (i.e. conflicts of interest), but it was a simple strategy with over 20 years of compelling data, written by a man with skin in the game and no ulterior motive but to share knowledge. The article was, of course, Beating the TSX by David Stanley. Enticed by the compound annual growth rate, it didn’t take me long to put this plan into action for myself. I liquidated my small rag-tag collection of funds and equities and invested in ten blue-chip dividend-paying stocks. I joked that I was now investing like an old man. But it felt strangely good. And that’s when the magic started happening. Sure, the returns were solid, but that was only half of it. I found that I no longer cared about what the stock market was doing on a daily basis. I wasn’t interested in anyone’s hot stock tips. Instead, I marveled at the consistent flow of stable dividends. I was happy to focus on the incomegenerating power of my portfolio rather than the volatility of its market value. I am no investing genius. The truth is I stumbled upon an excellent strategy and accumulated investments through a solid bull market. I’d rather be lucky than good - but this is the only kind of luck you can count on in investing - finding a good plan and sticking to it no matter what the market is doing.
and my kids still like me (most of the time.) This is not the time to sink more time and energy into a maxed-out career. It’s time for an epic family adventure: we are selling almost everything to travel around the world for a few years. Funded by... you guessed it: dividends. Serendipitously, this shift in our trajectory came at the same time as the offer to take on writing the BTSX articles. I could not be more honoured and excited for the challenge of taking on such an important role. I know how crucial these articles have been for me over the years and I am committed to maintaining the high standards of my mentors, Dave and Ross. What can you expect as readers going forward? Although I am sure my interests in behavioural finance and evidence-based investing will become apparent in time, I have no intention of making any fundamental changes to the system. Ross’ “tweaks” of using the calendar year and swapping out stocks that cut their dividends make sense to me and will be maintained. I’m a big fan of shaking things up every now and then and exiting one’s comfort zone. But there is value in the consistency of the BTSX articles over the years and I wouldn’t want to jeopardize that. Sometimes the best place for change is in your pocket. Having said that, I am certainly open to friendly insights and opinions from the CMS readership. No matter where we are on the planet, feel free to get in touch.
Matt Poyner is a DIY investor currently traveling the planet with his wife and four boys. He can be reached at bfsw2018@gmail.com. Their travel blog is www.big-family-small-world.com.
When Ross Grant took the reins five years ago, I read his book with great eagerness. What I found was a validation of the method and new motivation: early financial independence. I was starting to think about money differently—not just as a means to buy nice stuff but as a means to buy my time back from a job that was becoming more and more draining.
Ross Grant is the e-book Author of Destination: Early Financial Independence, available on Amazon and Kobo for $5.99. Free e-reader software is available for PCs, MACs, etc. to view the book. Please email Ross if you need the links. You can reach him at RossGrantEFI@gmail.com
As you may know from my last article, it is five years later and through a combination of accumulated assets and voluntarily simplifying our lifestyle, our family is now financially independent.
David W. Stanley, Guelph, Ontario
What are we doing with this freedom? I’m 41, healthy, 10 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z SEPTEMBER 2018