Oct 262015
 

What a Liberal Government Means for Canadian Investors ?

Last week the charismatic Justin Trudeau lead the Liberals to win the 2015 federal election. I’m sure his good looks has nothing to do his popularity and success. 😛

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Justin pledged to make meaningful policy changes to the country that could benefit millions. But will his commitments help you? The jury is still out on the long-term effects, but here’s a TL;DR summary of what Trudeau’s government means for Canadian personal finance and investors in the short term.

The new Liberal majority government will…
HelpHinder
  • spenders
  • low-income seniors
  • stock market investors
  • students
  • most middle-class workers
  • savers
  • high-income households
  • single-income nuclear families

These are only generalizations. The rest of this post will explain individual policies that could affect your pocket book. Keep in mind that just because politicians promised something during their campaign, it doesn’t mean they will always follow through. Any of these policy changes below could be altered or cut completely going forward.

Borrowing To Invest. ? Going back into Deficit. 

According to the federal finance department, Canada’s government had a $1.9 billion surplus in the 2014-2015 fiscal year. 🙂 But the new Liberal government under Trudeau plans to run a $10 billion deficit for each of the next 3 years, before balancing the budget again in 2019.

Going into more debt as a way to expand economic output isn’t necessarily a bad idea. $10 billion is peanuts relative to our $1,827 billion/year economy (0.6%.) Also, our national debt to GDP ratio is quite low by international standards, which means we can borrow money at ridiculously low costs. New 10 year Canadian government bonds are currently yielding 1.5% in annual interest.

After factoring in inflation, there might actually be no real cost to tax-payers, lol. 🙂 Craig Alexander, the Vice President at the C.D. Howe Institute, said that despite digging deeper into debt, the debt to GDP ratio of Canada is still going to decrease over the next three years because our GDP is expected to increase as well. 😀

About a third of the new spending will go towards much-needed public transportation and infrastructure development and repairs. This means building more roads, highways, bridges, etc. This should improve the country’s productivity because gridlock and urban densification are causing major problems right now in large cities such as Toronto, Montreal, and parts of Vancouver. The other two-third of public spending is planned for social housing, seniors centers, and clean energy projects like solar and wind farms.

Due to more deficits and fiscal stimulus the Bank of Canada will be less likely to further cut interest rates for the time being.

What this means for you: Invest your money. Historically the S&P/TSX Composite performed well during times of deficit spending. Below is a graph I put together using stock market returns and government budget information courtesy of the CBC. During the two decades from 1995 to 2014 there have been 9 years where the government ran a deficit budget. And the stock market had positive returns in 8 out of those 9 years.

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Economic stimulus increases employment and grows the economy so people and businesses feel more optimistic about their investments which tend to be bullish for the financial markets. 🙂 In particular I would consider investing in stocks or sectors that have exposure to financials, cannabis, industrial goods, construction, utilities, preferred shares, and green technology (solar panels, wind, etc.)

Goodbye annual $10,000 TFSA contribution limit ?

The Tax-Free Savings Account annual contribution limit will revert back to $5,500 and increase in $500 increments based on inflation. This will make it harder for Canadians to save and won’t benefit the middle class. There’s a rumor that the TFSA only helps the rich get richer. But that’s baloney! The TFSA actually helps anyone who wants to save get richer. Here’s a table courtesy of the National Post which shows that many low and middle-income families still managed to max out their TFSA contribution rooms in 2013 when the limit was still $5,500.

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Sep 302015
 

Deciding what to do with new money

As the average global population continues to age there will be greater instances of wealth transfer from the old to the young. Most people will come into a bonanza sooner or later. Maybe it’s $5,000, or maybe it’s $500,000. Whatever the amount happens to be, it’s essential to grasp the significance of this opportunity and not squander it. A dollar saved is worth more than a dollar earned because of income and payroll taxes.

There is no shortage of questions on the internet that has the renowned format, “I have $X amount of money. What should I do with it?” The following snippets are taken from Reddit.

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First of all, congratulations for saving, earning, inheriting, winning, or however else you came into the money. 🙂 The simple answer to what you should always do with your new found fortune is this: Maximize the utility of that money based on your personal core values and financial situation.

But that might be easier said than done, so let’s elaborate. Maximizing utility means making the best use of that money and stretching the value of each dollar to its greatest potential. This is determined by your values and financial affairs, and to a degree, the current state of the economy. Values drive motivation and we’re all motivated by different things. Wanting to retire early requires a different set of values and financial strategy than becoming a home owner. Understanding your financial situation means knowing what money means to you.

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Aug 052015
 

The Easiest way to Plan for Retirement

Some people say the money is no better when we retire, but the hours are! But how much money is enough to retire on? Retirement planning can sometimes be difficult if we don’t know where to start, or how much to save.

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So today I’d like to simplify the process and break it down into two commonly asked questions. Answering both these questions will determine if you are either on the right track to retirement or falling behind. You can use the handy retirement calculator further down the post to find out. Let’s start with the first question.

How Much Money Do I Need To Retire?

Assuming you’ll retire at age 65, here is the formula to figure out how much money you will roughly need to have saved up by the start of your retirement. By “money,” I mean investable assets which include your retirement accounts, investment properties, stock portfolio, annuities, etc.

 [1.019 ^ Number of years left until retirement] x [25 x (Current Annual Expenses – $14,000)] = Total Savings Needed to Retire

So for example, imaginary Laura is 40 years old and spends $30,000 a year. She wants to find out how big her investment portfolio will need to be when she eventually stops working 25 years from now.

[ 1.019 25 ] x [25 x ($30,000 – $14,000)] = $640,345

Using the formula Laura would need to have $640,346 saved up by 65 years old to retire. For couples and families, simply use the total annual household expense and replace the $14,000 figure with $25,000 instead.

This brings us to the second common question everyone wants to know:

How Much Money Should I Be Saving Each Year?

Laura has amassed an investment portfolio worth $100,000 so far. She currently saves $5,000 a year by making automatic contributions to her retirement account, but is it enough? She knows from the first formula that she needs $640,346 to retire by 65. She can use the following formula to calculate how much she needs to actually save per year.

0.05 x (Total Savings Needed to Retire – Current Savings Amount x 1.05 ^ Number of years left until retirement) / ( 1.05 ^ Number of years left until retirement – 1 ) = Suggested Annual Savings Rate 

Alas, it appears saving $5,000 per year is not enough for her since she’ll need to save at least $6,322.

[0.05 x (640,345 – 100,000 x 1.0525 ] / [1.0525-1] = $6,322

Use the following spreadsheet to experiment with your own retirement numbers. 

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Download Freedom 35 Blog’s Simple Retirement Income Calculator Excel File. It has both formulas in it. 😉 (Alterative .ods version.)

Laura decides to increase her retirement contributions by $150 every month, bumping her total annual savings to $6,800. It’s important to make these changes early because increased savings will translate directly into decreased spending. If she can live on less money now then she will also require less savings to retire on in the future. Well done, Laura! 😀

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May 222015
 

Those who invest in cocoa should put their money behind bars. Chocolate bars that is! 😀 Earlier this week in part 1 of my investing in chocolate series I wrote about the insatiable global appetite for chocolate and how to make money from that. 🙂 Today I’ll go into details about how I plan to do it.

Last week I purchased about $4,000 USD of chocolate companies, Hershey Co and Mondelez International Inc. 😀 Both are major players in the chocolate space and own some very high quality products and valuable brands. I bought 20 shares of HSY and 50 shares of MDLZ, which is roughly $2,000 of each company.

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As we can see I bought these 2 stocks in my US dollar TFSA for efficiency. I’ll post a tutorial on how to open a registered $USD account in the future if anyone’s interested. For now let’s go over some analysis to understand why I believe these companies should be in my long term investment portfolio.

The Hershey Company

Famous investor Warren Buffett said one of the secret formulas to a successful business is to “buy commodities, and sell brands.” That is exactly what Hershey is doing. 🙂 It purchases sugar, milk, cocoa, etc, and sells products that have major brand recognition. About half of the chocolate consumed in America is milk chocolate, and that is what Hershey is known for. 🙂 If someone goes into a candy store to buy a Hershey chocolate bar and the store owner says “sorry, we don’t have Hershey, but we have this other generic brand that is 20% cheaper,” then the customer will probably leave and try to find another store to get his Hershey fix. 😆 That is the power of brand loyalty. It automatically puts a 20% value premium over other businesses offering the same food. Check out some of the awesome brands Hershey is responsible for.

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Feb 032015
 

Nobody likes to pay banking fees. But most monthly service charges can be waived if we sign up for additional accounts/services, or keep the minimum monthly balance in the account. (eg: maintain at least $1,500 in a Bank of Montreal chequing account to waive the $4 fee.)

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My personal account is with TD Canada Trust, which charges $3.95/month unless a minimum balance of $1,500 is held in the account at all times. But sitting on unused money can be a waste of capital. 😕 So 3 years ago I introduced an alternative solution to deal with those pesky bank fees. Rather than pay the bank to hold my money, I made the bank pay me instead! 😉

Hedge Bank Fees with Bank Stocks

Here’s what I did in a nutshell.

  1. Transfer the $1,500 from my chequing acct to my brokerage acct and use it all to buy TD shares (38 in today’s shares)
  2. Receive dividend payments every quarter as a TD Bank shareholder
  3. Use said dividends to pay for the $3.95 monthly service fee associated with my chequing account

(see my original post from February 2012 for more details.)

Since it’s been a few years I thought I’d post an update to show how my strategy has turned out so far.

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