Sep 272015
 

3 Year History

Usually when investors talk about expected market returns we like to look at historical averages. Over the past 115 years stock markets in the developed world delivered an annualized return of roughly 8.5%. This means we can probably assume that a normal range would be somewhere between 6% and 11%.

I use TD as my discount brokerage at the moment. It has a useful tool to help me gauge my portfolio performance over the years. Most of my stocks are held in registered accounts such as TFSAs or RRSPs, which have preferential tax benefits. 🙂 Here is a quick overview of how my securities in those accounts have performed over the last 3 years. The green line represents my portfolio performance.

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As we can see my overall stocks have achieved a 7.33% annualized rate of return since Sept 2012. This is not that surprising and falls within the 6% to 11% range of a normal market return. 🙂 Also since I can’t use margin to borrow and invest inside these registered accounts, none of my stocks in this chart uses any leverage.

The blue line represents the Canadian stock market index, which has only returned 8.65% over the last 3 years, or 2.8% annualized. This means I technically beat the market here in Canada by more than 4% a year, which is just peachy keen! 😀 But that’s probably because I hold some U.S. stocks in my RRSP and TFSA.

The purple line represents the S&P 500 index in the U.S. The graph shows it has climbed 80.22% since 2012. But keep in mind that this factors in the currency exchange. Otherwise, the return in $USD is closer to 47%, which is still pretty dope. The U.S. currency has become very strong over the past couple of years. Any Canadian who held U.S. stock would have seen double-digit returns even if the price of their stocks didn’t change domestically in U.S. dollars. 😀

Here are a few things I learned from this performance chart. I’ll be keeping these things in mind going forward.

  • It’s possible to pick and choose individual stocks without underperforming the market index, as long as you have the discipline to buy and hold most of the time.
  • Canadian stocks rely too much on commodity prices. Whenever oil and metal prices fall the market really struggles. 🙁
  • Buy some foreign currencies to hold investments that are denominated in those currencies.
  • Diversify globally. Holding a Canadian equity index fund, like the Vanguard Canada All Cap Index ETF, (symbol VCN,) would have barely even beat inflation over the past 3 years, and even the past 5 years.

Continue reading »

Sep 052015
 

Simple Tax Saving Tips for Anyone

People who work for either the CRA or the IRS often feel stressed out because their jobs are so taxing. ? Everyone has to pay taxes of course, but here are a few easy tax saving tips that you can use to minimize your tax burden.

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  1. Income-split with your trusting spouse.
    It’s easy to shift the tax liability from a family member with a higher income to a family member with a lower income to reduce the overall tax a household has to pay. 🙂 Opening a joint non-registered account allows couples to income-split any capital gains down the road, which can save a lot of tax money if one spouse earns more than the other. And if anything happens to one person, the other person takes over the entire account with no messy legal or estate business. A spousal RRSP strategy can also achieve similar results.
  2. Earn more money from investments, instead of working.
    Capital gains and dividends are taxes less than active income such as from salary or wages. For example, in Canada, you can make up to $50K a year without paying any income tax, 😉 as long as all your income comes from eligible dividends. This is why it’s so important to prioritize investing over spending, especially at the beginning of someone’s career. Once an investment portfolio is large enough it will have enough momentum to continue growing by itself without any more additional savings. A job delivers high-risk income because it’s relatively common for jobs to be lost, along with the income. But investment gains, on the other hand, are low-risk. Counting on a steady stream of dividends in a diversified portfolio is much more reliable than relying on income from work or from running a single business.
  3. Make use of tax-advantaged accounts.
    401(k) and IRAs can be used by Americans to shelter their taxes. In Canada, the best vehicle we have is the Tax-Free Savings Account (TFSA.) The combined TFSA contribution room for a couple is $82,000 today. That is more than enough to invest in a broad range of low-fee index funds, where the future gains won’t be taxed. 🙂 If you manage to max out all your TFSA room, or if you’re a high-income earner with 140K+ salary, you have up to $25,000 of contribution room in your RRSP for just this year alone. Max out all your tax efficient vehicles before buying stocks, bonds, or ETFs in a regular cash (or non-registered account.)

By using just the 2nd and 3rd tips in this post, I save more than $5,000 of income tax every year. A little planning can go a long way!

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Random Useless Fact: 

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Jul 072015
 

Determining which accounts (Tax Free, Retirement, or Taxable) to hold different investment types in

Should you put stocks in your RRSP or TFSA? What about fixed income like bonds? This post will answer these types of questions. It’s assumed the reader is already familiar with the TFSA, RRSP, and regular taxable accounts.

There are two parts to every investment decision we make; the investment itself, and the type of account to hold that investment in.

Asset allocation helps to spread out our risk so we don’t put all our eggs in one basket. But asset location is also important because different types of investment incomes are taxed at different rates. We can hold our investments in special tax advantaged accounts to shelter our profits so we don’t pay more tax than we have to. 😉

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In an ideal world all of our investments would be bought inside tax advantaged accounts such as a TFSA or RRSP. There’s little reason to use a non-registered (taxable account) if there is still contribution room remaining in our tax free or registered retirement accounts. However its possible to purchase more investments than what our tax advantaged accounts will hold. If that’s the case then investment income that is typically taxed at higher rates should take priority inside a TFSA or RRSP. So with that in mind let’s get down to the nitty-gritty. 🙂

Which Investment Vehicles to use: TFSA, RRSP, or Non-Registered

Where is the best place to put stocks, bonds, mutual funds, and ETFs? Should they go in an RRSP or a TFSA? There is no categorically correct answer but here are some general guidelines that I follow.

  • Use RRSPs for interest producing investments and U.S. dividend paying companies.
  • Use non-registered accounts for Canadian dividend paying companies and preferred shares.
  • Use TFSAs for everything else.

For a deeper look, below are two charts that go into specifics. The first chart shows how different types of investment income is taxed in different kinds of accounts for someone in the 31% marginal tax bracket. The second chart suggests the best accounts to buy different types of specific investments in. 😀

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Additional notes to consider:

  • If we hold U.S. dividend stocks in a taxable account we’ll pay the 15% U.S. withholding tax off the top. But we can claim a foreign tax credit on our tax returns to recover some or all of this amount. However we’ll pay tax at our marginal rate on the full amount of the U.S. dividend. The net result is that U.S. dividends held in a non-registered account will be taxed at the same rate as interest income.
  • Dividend income from U.S. dividend stocks in a Tax Free Savings Account (TFSA) is also subject to the 15% withholding tax, however this tax is non-recoverable. But the remaining dividend and any capital gains is not taxed.
  • Dividend income from U.S. stocks in an RRSP are exempt from the 15% withholding tax. But this only applies if we directly hold a stock or ETF traded on a U.S. exchange. If the U.S. stocks are held in a Canadian mutual fund or ETF, we will need to pay the unrecoverable 15% withholding tax on the dividends.
  • Keep in mind that although many investment incomes are tax efficient while being held in an RRSP, any money withdrawn from the RRSP or RRIF later on will be subject to income tax at the full marginal rate and could trigger claw-backs for income tested government benefits like OAS.
  • Tax efficiency should not be the only factor when deciding which account to put an investment into. Simplification of record keeping, personal financial situation, risk tolerance, and retirement goals all have to be considered.
  • For most intents and taxation purposes RESPs behave the same way as TFSAs. RRIFs and LIRAs behave similar to RRSPs.

Continue reading »

Apr 222015
 

Finance Minister, Joe Oliver introduced the government’s 2015 Federal Budget yesterday. The big takeaway is that there will be tax breaks for everyone. Yay! 😀 The proposed budget is expected to get passed as the Tories hold a majority government.

It’s nice to finally see some welcomed changes in fiscal policy to address the economy rather than rely on monetary policy alone. 🙂 Federal budgets are important because it shapes the way we plan our personal finances.

Increased TFSA Contribution Room

The annual contribution limit for the Tax Free Savings Account rises to $10,000 effective immediately. This means Canadians who have already maxed out their TFSA for 2015 will now have another $4,500 of contribution room to use. The TFSA is a holding account where we can buy investments and not pay taxes on the gains.

Some people believe this change will only benefit the upper class who are already wealthy. Here’s my poor attempt at humour on Twitter from yesterday.

However, Ottawa says that individuals with annual incomes of less than $80,000 accounted for more than 80% of all TFSA holders at the end of 2013. And about half of TFSA holders had annual incomes less than $42,000, meaning the TFSA is mostly being used by the middle class. Personally I think the new TFSA policy benefits serious savers, not necessarily the wealthy.

RRSP delays taxation to a future date when we’ll likely be in a lower income tax bracket than today. Gains in a TFSA are made from after tax contributions and are not taxed, for the most part. So between the RRSP and TFSA average Canadians now have a lot more freedom and room to save and invest with preferential tax treatments.

Here’s a table showing how much someone would need to save to max out both accounts. The maximum RRSP contribution limit assumes the person earned the same income in the previous year.

Combined Tax Sheltered Savings Table 2015

Annual Gross IncomeMax TFSA RoomMax RRSP RoomCombined TFSA/RRSP Limit% of Income
$20,000$10,000$3,600$13,60068%
$30,000$10,000$5,400$15,40051%
$40,000$10,000$7,200$17,20043%
$50,000$10,000$9,000$19,00038%
$60,000$10,000$10,800$20,80035%
$70,000$10,000$12,600$22,60032%
$80,000$10,000$14,400$24,40031%
$90,000$10,000$16,200$26,20029%
$100,000$10,000$18,000$28,00028%

 

As we can see people who make $50,000 a year will have to save more than 38% of their incomes before running out of space in tax advantaged accounts. There is no point in buying GICs, bonds, stocks, mutual funds, and other investments in a regular cash account anymore, unless you’re like me and trade derivatives or buy securities on margin. 😉

Decreased Minimum RIF Withdrawal Rate

The new federal budget also gives seniors more options. When an RRSP is converted into a Registered Retirement Income Fund (RRIF) retirees will be able to leave more money in their tax sheltered account each year to help their savings last longer and can also lower their overall tax burden. The proposed new RIF minimum withdrawal rate will decrease from the current 7.38% at the age of 71, to 5.28% starting at the age of 71, and gradually increase to 20% by age 95. 😄

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In general lower income, and younger folks should prioritize saving in a TFSA before considering RRSP, and vice-versa for high income earners. I like to put bonds in my RRSP, and the more volatile, higher potential investments in my TFSA. For most Canadians I believe the TFSA has a more important role in our financial lives than the RRSP. However, both are important as the RRSP can save us money today by delaying the tax liability to future years, while the TFSA can save us money in the future. Holding the right amount of each can minimize the overall taxes we pay over time.

Continue reading »

Jan 102014
 
Retiree Wins Lottery – Then Gives it all Away

What would you do if you won the lottery? Tom Crist, retired CEO of an electrical wholesale company who lives in Calgary, said he’s giving away his entire $40 million Lotto Max prize. He lost his wife to cancer 2 years ago. He now plans to put the lottery winnings into a trust fund to be given out over the years to charities such as the Canadian Cancer Society. “I don’t really need that money.” He said. Faith in humanity restored 😀

 

Weak Loonie

The Canadian dollar fell to just 92 cents USD lately. This is the lowest our currency has been since 2009. Fantastic news for manufacturers and exporters 🙂 If you are American this is great news for you too because Canadian goods are now more affordable for you. Last year when we were at parity I suggested Canadians should buy U.S. assets like stocks or currency. I wrote about buying Google, Qualcomm, Starbucks, and Disney when the $CAD was still high.  Now the tides have turned, our Loonie’s value has dropped, and I’m reaping the rewards 😀

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Every Major Marvel and DC Movie Release Until 2019

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2014 Movie Releases

Speaking of Disney (DIS), they have several Marvel blockbuster movies coming out this year. Each one is expected to make huge profits. Disney shares are up 43% year over year! How can anyone possibly resist investing in this globally diversified, money printing company? 😀 Anyway, here are a list of popular movies that are coming out this year 🙂

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TFSA Participation Fail

A recent ING DIRECT survey revealed that 53% of Canadians still don’t have a TFSA.

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Not having the money to contribute is the main reason they haven’t opened a tax free savings account yet. If you are currently in school and have $50,000 of student loan debt and no income yet, then it’s understandable that you have no savings. But for most people who can put some money away the TFSA is one of the best tax saving vehicles there is. We have a perfectly legal way to not pay any taxes on our investment gains, yet less than half of us are actually using it? ( ಠ_ಠ)

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Video of the Week

Caterpillars in Hawaii have developed hunting skills

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Blog roundup – Below are some finance and other articles from around the web this week.