Month: December 2015

Act, React or Just Plan Ahead

Most investors have a consistent and orderly life so it is somewhat surprising that the current choppiness in the markets would trigger investors to want to alter their portfolios or make even more far reaching changes. Volatile market conditions may prompt investment changes, but giving into temptation and responding to short term circumstances should be avoided at all costs. Volatility is just a normal part of investing and if anything is going to be done it should be to re-assess, re-affirm and ensure your clients goals and objectives are accurate.

Although the basics are mother’s milk to most seasoned investors, they bear repeating: focus on asset allocation as it is the most important investment decision your clients will ever make; use high conviction active managers; pragmatically diversify investments with an emphasis on reducing downside risk; ensure the cost and implementation structure is efficient and disciplined; and avoid the latest fads and flavour of the month as your clients’ portfolios are meant to last for years.

One item that is overlooked or deliberately ignored by most investors is the concept of asset consolidation. It is commonly believed that for every dollar clients have with one advisor they have three elsewhere. However, creating a streamlined and efficient portfolio will benefit clients on many levels. Clients use multiple advisors for many reasons but persuading your clients to consolidate their holding will significantly help them meet their investment needs both today and for future generations. The list of benefits for clients is just too lengthy to ignore but include the following.

Asset mix: Consolidation can help manage the asset mix and limit duplication of holdings. It provides a clear picture of the client’s total holdings. Multiple advisors could lead to dangerous levels of concentration of holdings and poor tax efficiency as the household assets are managed for divergent purposes across different providers.

Simplicity: Get a better view of your client’s overall situation. Multiple advisors means multiple statements, multiple solutions and usually multiple (and likely diverging) points of view of the current state of the market and the future outlook. All of these could lead to a great deal of confusion for all but the most astute clients.

Service: In a perfect world all clients are treated equally. Unfortunately larger clients tend to get better service so having multiple small accounts would likely mean clients would get less than the optimal attention at each institution. Consolidation would overcome this issue.

Reducing Risk: In the past multiple advisors were a way to diversify risk. But in reality excess diversification comes at a great cost because it increases the likelihood of having index–like portfolios but paying active management fees. This is a recipe for guaranteed underperformance.

Savings Fees: Clients often pay lower fees when they consolidate their assets. Since it is not possible to guarantee investment returns, ensuring the best potential results is only possible by minimizing fees and taxes.

Creating a Plan: A major flaw of most financial planning analysis is the need to use expected return numbers. If there are duplicate portfolios across multiple firms then determining potential future results becomes a difficult challenge.

Managing Cash Flow: To obtain a complete picture of a client’s financial situation the advisor needs to understand their total level of income earned. This can be difficult to manage across multiple investment accounts.

Estate Planning: Having investments with one firm will simplify estate planning and administration for navigating the increasingly complex probate process.

Monitoring Performance: Comparing the performance of multiple providers is difficult unless there is really a true apples-to-apples comparison, which is seldom the case. It is easier for clients to understand how their investments are performing when the assets are consolidated.

Better Clarity: Knowing the entire financial picture provides clients with a customized and personalized service. For example, if the registered and non-registered accounts are at different firms, tax minimizing asset mix based opportunities become difficult to achieve. As well, consolidation would limit the confusion and number of tax receipts each year and likely reduce the client’s accounting fees for completing complex income tax returns.

For advisors the opportunities for increasing assets and strengthening relationships with clients is very compelling. Recent retirement demographic trends and the potential wave of money that will be released as the inter-generational transfer of assets gathers steam, will drive the need for clients to consolidate their wealth. The objective should be to plan ahead and act now. Simply reacting at some point in the future will likely cause the rewards to slip through the current advisor’s fingers and into a competitor’s hands.

Big Bad Bear Market

This table shows the performance of the Goldman Sachs Commodity Index in both U.S. and Canadian dollars, as well the exchange rate for these currencies. From December 1999 to June 2008 commodity prices gained 230.5%...If stock markets around the world had fallen by more than 50% from their peak, investors would have been in quite a tizzy with the panic of collapse and catastrophe running rampant. But it is not stocks that are in a nasty bear market, it is commodities. They are far less important from an investment perspective in many parts of the world, 9.7% in the U.S. and 11.6% internationally based upon their stock market weighting. However, in major commodity-producing countries such as Canada where commodities currently represent 29.1% of the stock market (down from a peak of more than 50.0% at the height of the commodity cycle), the drop in prices means job losses and currency devaluation.

While the decline in commodity prices has foreshadowed broader concerns about the global economy, the principal question is whether the fall in commodity prices will be good news (stimulate economic growth like a tax cut) or bad news (further weaken already depressed economies). This question comes down to one nation, China. It was soaring Chinese demand for raw materials that caused the great bull market in 1999 and significantly contributed to its demise as growth slowed to its weakest pace in 25 years. Record demand through the early 2000s has now left the world awash with oil, natural gas, iron ore and copper.

The 2008 collapse in commodity prices is evident in the middle of this chart as shown by the Goldman Sachs Commodity Index (US$). The index is now back to the level it was at 15 years ago and it has taken the Canadian dollar along for the ride.It is almost like the twenty-first century never happened from a commodity pricing point of view. As the accompanying chart and data show, the so called commodity super cycle is pretty much back to where it started. Both the Goldman Sachs Commodity Index (one of the most widely recognized investable commodity benchmarks) and Canadian/U.S. dollar exchange rate were indexed at 100 on December 31, 1999 (using month end data) to show how both commodities (in U.S. dollar terms) and our currency have fared over the past 15 years. It is not a pretty picture. From the start to its peak in June 2008, commodity prices gained 230.5%. Since then it has been downhill, despite a small rebound from 2009 to 2011, as prices plunged 68.2%. At the same time the Canadian dollar had gained 46.2% at the commodity price peak and has since fallen 23.8%.

The much anticipated U.S. interest rate hike (the first since 2006) is expected in December and has helped  push up the U.S. dollar 13.1% this year, which has only added to the woes of commodities since they are mostly priced in U.S. dollars. However, since the Canadian dollar has fallen so sharply against the U.S. dollar since the peak in commodity prices, it has helped to ease the fall for many producing companies. Commodity production costs have gotten cheaper so many companies are still making some money. This might have deferred some of the pain but it will also delay any recovery. The incentive to cut supply is less intense so it will make it harder for the marketplace to mop up excess raw materials anytime soon. But eventually the market will correct itself. It always does.

While the global economy is in far better shape now than it was in the aftermath of the 2008 recession, the momentum for commodities is clearly negative with potentially more weakness expected in the future. This could have negative ramifications for the Canadian dollar as well, since it is still 11.4% above where it was when the commodity cycle started in 1999. On the other hand a weaker dollar will likely be good for exporters since the Canadian economy is dominated by foreign trade. This will likely be very good for the stock market, eventually.

MARKET DATA

This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.
While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.

Act, React, or Just Plan Ahead

Most investors have a consistent and orderly life so it is somewhat surprising that the current choppiness in the markets would trigger investors to want to alter their portfolios or make even more far reaching changes. Volatile market conditions may prompt investment changes, but giving into temptation and responding to short term circumstances should be avoided at all costs. Volatility is just a normal part of investing and if any action should be taken it should be to re-assess, re-affirm and ensure your goals and objectives are accurate.

Although the basics are mother’s milk to most seasoned investors, they bear repeating: focus on asset allocation as it is the most important investment decision you will make; use high conviction active managers; pragmatically diversify investments with an emphasis on reducing downside risk; ensure the cost and implementation structure is efficient and disciplined; and avoid the latest fads and flavour of the month as your portfolio is meant to last for years.

One item that is overlooked or deliberately ignored by most investors is the concept of asset consolidation. It is commonly believed that for every dollar clients have with one advisor they have three elsewhere. However, creating a streamlined and efficient portfolio will benefit investors on many levels. Investors use multiple advisors for many reasons but consolidating their holding will significantly help them meet their investment needs both today and for future generations. The list of benefits for clients is just too lengthy to ignore but include the following:

Asset mix: Consolidation can help manage the asset mix and limit duplication of holdings. It provides a clear picture of the client’s total holdings. Multiple advisors could lead to dangerous levels of concentration of holdings and poor tax efficiency as the household assets are managed for divergent purposes across different providers.

Simplicity: Get a better view of your client’s overall situation. Multiple advisors means multiple statements, multiple solutions and usually multiple (and likely diverging) points of view of the current state of the market and the future outlook. All of these could lead to a great deal of confusion for all but the most astute clients.

Service: In a perfect world all clients are treated equally. Unfortunately larger clients tend to get better service so having multiple small accounts would likely mean clients would get less than the optimal attention at each institution. Consolidation would overcome this issue.

Reducing Risk: In the past using multiple advisors was a way to diversify risk. But in reality excess diversification comes at a great cost because it increases the likelihood of having index-like portfolios but paying active management fees. This is a recipe for guaranteed underperformance.

Savings Fees: Clients often pay lower fees when they consolidate their assets. Since it is not possible to guarantee investment returns, ensuring the best potential results is only possible by minimizing fees and taxes.

Creating a Plan: A major flaw of most financial planning analysis is the need to use expected return numbers. If there are duplicate portfolios across multiple firms then determining potential future results becomes a difficult challenge.

Managing Cash Flow: To obtain a complete picture of a client’s financial situation the advisor needs to understand their total level of income earned. This can be difficult to manage across multiple investment accounts.

Estate Planning: Having investments with one firm will simplify estate planning and administration for navigating the increasingly complex probate process.

Monitoring Performance: Comparing the performance of multiple providers is difficult unless there is really a true apples to apples comparison, which is seldom the case. It is easier for clients to understand how their investments are performing when the assets are consolidated.

Better Clarity: Knowing the entire financial picture provides clients with a customized and personalized service. For example, if the registered and non-registered accounts are at different firms, tax minimizing asset mix based opportunities become difficult to achieve. As well, consolidation would limit the confusion and number of tax receipts each year and likely reduce the client’s accounting fees for completing complex income tax returns.

The objective should be to plan ahead and act now.

ESSENTIAL TAX NUMBERS (for 2016)

Here is a list of areas of interest when considering your taxes, including contribution limits and possible tax credits. It was an article from Advisor.ca.

WORKING CLIENTS

  • Maximum RRSP contribution: The maximum contribution for 2016 is $25,370, and for 2015 is $24,930.
  • TFSA limit: The annual limit for 2015 is $10,000, for a total of $41,000 in room available for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009. The annual TFSA limit for 2016 is $5,500, to be indexed to inflation in future years, bringing total room to $46,500.
  • Maximum pensionable earnings: For 2015, the maximum pensionable earnings is $53,600, and the basic exemption amount is $3,500. And, for 2016, maximum pensionable earnings under the Canada Pension Plan will be $54,900, while the basic exemption amount will remain the same.
  • Maximum EI insurable earnings: The maximum annual insurance earnings (federal) for 2015 is $49,500, and for 2016 is $50,800.
  • Lifetime capital gains exemption: The lifetime capital gains exemption is $824,176 in 2016 and$813,600 in 2015.
  • Low-interest loans: The current family loan rate is 1%.
  • Home buyers’ amount: Did your client buy a home? He or she may be able to claim up to $5,000 of the purchase cost, and get a non-refundable tax credit of up to $750.
  • Medical expenses threshold: For the 2015 tax year, the maximum is 3% of net income or $2,208, whichever is less. For 2016, the threshold is the lesser of 3% or $2,237.
  • Donation tax credits: after March 20, 2013, the first-time donor super credit is 25% for up to $1,000 in donations, for one tax year between 2013 and 2017.

 

OLDER CLIENTS

  • Age amount: Clients can claim this amount if they were 65 years of age or older on December 31 of the taxation year and, for 2015, their income was below $82,353. The maximum amount they can claim is $7,033 in 2015, and $7,125 in 2016.
  • Pension income amount: Clients may be able to claim up to $2,000 if they reported eligible pension, superannuation, or annuity payments.
  • OAS recovery threshold: If your client’s net world income exceeds $72,809 for income year 2015 (and $73,756 for 2016), he or she may have to repay part of or the entire OAS pension.

 

CLIENTS WITH CHILDREN

  • Children’s fitness tax credit: If your client’s children played baseball, soccer, or participated in some other program of physical activity, clients may be able to claim up to $1,000, per child, of the cost of these programs. Clients can claim an additional $500 for each eligible child who qualifies for the disability amount and for whom they’ve paid at least $100 in registration or membership fees for an eligible program.
  • Children’s arts tax credit: If clients’ children participated in a program of artistic, cultural, recreational, or developmental activity such as tutoring, clients may be able to claim up to $500 of the fees paid, per child, on these programs. Clients can claim an additional $500 for each eligible child who qualifies for the disability amount and for whom you have paid at least $100 in registration or membership fees for an eligible program.
  • Family caregiver amount: If you have a dependant who’s physically or mentally impaired, you may be able to claim up to an additional $2,058 in calculating certain non-refundable tax credits.
  • Working income tax benefit (WITB)*: in 2014, the maximum benefit for single individuals without children is $998 (Canada excluding Alberta, Quebec, B.C. and Nunavut). The maximum benefit for families is $1,813 (Canada excluding Alberta, Quebec, B.C. and Nunavut).
  • Disability amount: The amount for tax year 2015 is $7,899, and 2016 is $8,001.
  • Child disability benefit: The Child Disability Benefit is a tax-free benefit of up to $2,695 per year ($224.58 per month) for families who care for a child under age 18 with a severe and prolonged impairment in physical or mental functions.
  • Universal child care benefit (UCCB): The UCCB is a monthly payment of $100 per eligible child under the age of 6 years. For 2015, there is a benefit of up to $60 per month for children aged 6 to 17, bringing the amount to $160. For 2016, the UCCB will be in place until July 1, at which point a new, to-be-determined child benefit will replace it.

*CRA site has yet to update for 2015.

 Published in Advisor.ca December 9, 2015

Big Bad Bear Market

This table shows the performance of the Goldman Sachs Commodity Index in both U.S. and Canadian dollars, as well the exchange rate for these currencies. From December 1999 to June 2008 commodity prices gained 230.5%...If stock markets around the world had fallen by more than 50% from their peak, investors would have been in quite a tizzy with the panic of collapse and catastrophe running rampant. But it is not stocks that are in a nasty bear market, it is commodities. They are far less important from an investment perspective in many parts of the world, 9.7% in the U.S. and 11.6% internationally based upon their stock market weighting. However, in major commodity-producing countries such as Canada where commodities currently represent 29.1% of the stock market (down from a peak of more than 50.0% at the height of the commodity cycle), the drop in prices means job losses and currency devaluation.

While the decline in commodity prices has foreshadowed broader concerns about the global economy, the principal question is whether the fall in commodity prices will be good news (stimulate economic growth like a tax cut) or bad news (further weaken already depressed economies). This question comes down to one nation, China. It was soaring Chinese demand for raw materials that caused the great bull market in 1999 and significantly contributed to its demise as growth slowed to its weakest pace in 25 years. Record demand through the early 2000s has now left the world awash with oil, natural gas, iron ore and copper.

The 2008 collapse in commodity prices is evident in the middle of this chart as shown by the Goldman Sachs Commodity Index (US$). The index is now back to the level it was at 15 years ago and it has taken the Canadian dollar along for the ride.It is almost like the twenty-first century never happened from a commodity pricing point of view. As the accompanying chart and data show, the so called commodity super cycle is pretty much back to where it started. Both the Goldman Sachs Commodity Index (one of the most widely recognized investable commodity benchmarks) and Canadian/U.S. dollar exchange rate were indexed at 100 on December 31, 1999 (using month end data) to show how both commodities (in U.S. dollar terms) and our currency have fared over the past 15 years. It is not a pretty picture. From the start to its peak in June 2008, commodity prices gained 230.5%. Since then it has been downhill, despite a small rebound from 2009 to 2011, as prices plunged 68.2%. At the same time the Canadian dollar had gained 46.2% at the commodity price peak and has since fallen 23.8%.

The much anticipated U.S. interest rate hike (the first since 2006) is expected in December and has helped  push up the U.S. dollar 13.1% this year, which has only added to the woes of commodities since they are mostly priced in U.S. dollars. However, since the Canadian dollar has fallen so sharply against the U.S. dollar since the peak in commodity prices, it has helped to ease the fall for many producing companies. Commodity production costs have gotten cheaper so many companies are still making some money. This might have deferred some of the pain but it will also delay any recovery. The incentive to cut supply is less intense so it will make it harder for the marketplace to mop up excess raw materials anytime soon. But eventually the market will correct itself. It always does.

While the global economy is in far better shape now than it was in the aftermath of the 2008 recession, the momentum for commodities is clearly negative with potentially more weakness expected in the future. This could have negative ramifications for the Canadian dollar as well, since it is still 11.4% above where it was when the commodity cycle started in 1999. On the other hand a weaker dollar will likely be good for exporters since the Canadian economy is dominated by foreign trade. This will likely be very good for the stock market, eventually.

MARKET DATA

This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.