Markets have been on an upward trajectory since late-March and most portfolios currently sit flat or slightly positive for the year.  This is quite the turnaround from just a few short months ago.

However, headwinds remain.  Renewed infection waves, policy exhaustion, and permanent economic damage are all short- and medium-term risks that markets have not fully priced in.

If you are already drawing down your portfolio and you are concerned about what the next few months or years may bring, here are a few strategies for you to consider:

Follow the plan: When we meet with our retired households, we always perform a cash flow exercise to determine what a sustainable drawdown is for a portfolio.  The analysis incorporates a rate of return of projection that is conservative relative to historical performance and factors in negative return years.  If you withdraw less than the upper limit of what is shown in the cash flow analysis, then you have a good chance of your portfolio outliving you.

Reduce your monthly withdrawal: Are you spending less these days, but still drawing the same (possibly taxable) income from your portfolio only for these funds to accumulate in your bank account?  If so, consider reducing your monthly withdrawal.  This preserves more of your funds in your tax-sheltered account to help you with your future cash flow needs.

Reduce your RRIF Minimum Annual Payment (MAP):  Anyone with a RRIF account must draw a prescribed minimum each year, usually in the 5-15% range.  One of the provisions of the federal government’s aid package was a special 25% reduction of the 2020 MAP.  We have written about this before and many of you have already taken advantage of this option.  If you wish to reduce your 2020 MAP, please contact us.

Replenish your cash wedge:  For most of our retired households, we place the equivalent of 1-2 years’ worth of cash flow in a safer cash or income investment.  This way, your short-term cash flow needs are not exposed to market volatility and you’ll never have to sell any of your investments at a low point in order to pay for living expenses or to make the minimum annual RRIF withdrawal.

This is called the “cash wedge” strategy and is an important retirement planning tool. The Globe & Mail wrote about it a few months ago (for subscribers only, but we can share a copy with you).

If your cash wedge balance is currently low, this is a great time to replenish it and secure the equivalent of one, two, or even three years’ worth of income depending on your overall market outlook.

Draw your lump-sums now: If you contact our office to say, “I’m going to need X dollars for a project in the next year or so, when’s the best time to take this from the portfolio?”, our answer will likely be “right now”.

This is less about timing the markets, and more about applying a philosophy of selling from a position of strength, rather than weakness.  We do not know what next month or next year will bring, but we do know that markets are at a short-term high.  Drawing sooner rather than later is the prudent move right now.

Pre-retirees: The above information applies to you too.  Normally, we reallocate your portfolio to a more conservative mix in the years leading up to retirement.  With markets at or close to their all-time highs, this is a great time to transition your portfolio.  You will end up taking profits from your equities, reducing portfolio risk, and securing your upcoming retirement cash flow needs.

If applicable, many of these ideas will be addressed at your next annual review.  However, we may contact you ahead of time if we feel your portfolio requires more immediate attention.  Of course, feel free to contact us immediately if you want to ensure these ideas are properly implemented in your portfolio.

Don’t hesitate to contact us with any questions around these strategies and how they may be relevant to your situation.

The post Portfolio Drawdown Strategies appeared first on Smof Investment Manager, LLC.

You may have read our Back to Basics article about RRSP and RESP.  

If you have a question about TFSAs that was not covered off in our FAQs section, don’t hesitate to contact us. 

Who Will Make Best Use of an TFSA? 

Generally speaking, you will benefit from a TFSA if you need a tax-sheltered way to save money for use in the short-term (think of down payment savings in addition to your RRSP Home Buyers Plan, or an emergency / vacation fund), if your working income is the same or lower than you anticipate your retirement income to be, or if your annual savings exceeds your annual RRSP space. 

What It Is and Is Not 

A Tax-Free Savings Account (TFSA) is a registered account structure. This means the Canada Revenue Agency keeps an annual track of contributions and withdrawals.  

A TFSA is not a basic savings account. You have many options within a TFSA structure. 

Similar to an RRSP, think of a TFSA as a shopping basket and the various investment options as different types of groceries. Within your basket, you can add multiple different groceries (investments) to your basket: stocks, bonds, mutual funds, ETFs, GICs, investment savings accounts, etc. Not all investments are TFSA-eligible, but investors can choose between many different options, or a blend thereof, within their specific appetite for risk. 

Dual Canadian/U.S. citizens – note that the IRS doesn’t recognize the TFSA as a tax-sheltered account structure. As such, we generally advise dual citizens against the use of a TFSA, as it adds an element of complexity and cost to U.S. tax returns. 

How Does a TFSA Work? 

• All adult-aged Canadian citizens and residents generate new TFSA contribution space each year.
• For 2020, $6,000 of contribution space was added for all Canadian adults.
  
• There is no tax savings on contributions. You contribute after-tax money.
  
• Like an RRSP, money invested in a TFSA grows tax-free.
  
• Unlike an RRSP or RRIF, money redeemed is not subject to any taxation.
  
• Funds redeemed are added back to your TFSA limit on January 1st of the next year.

Consider Jasmin, 36 years of age. She maximizes her TFSA space annually. She has contributed $69,500 to her TFSA and it has grown to $75,000. In late-November 2020, Jasmin wishes to redeem her entire TFSA to fund the down payment on a home purchase that closes in February of the following year.  

By redeeming the $75,000 in November, the entire $75,000 (not just the original $69,500 she contributed) will re-open on January 1, plus her new TFSA space for that following year. If she waits until mid-January, a bit closer to the home closing date, that $75,000 of space will be locked until the following January 1, and she’ll only be able to maximize the newly generated space. 

Frequently Asked Questions 

Question: I have contributed above my lifetime TFSA limit. What are the consequences and what do I do?
Answer: Unlike with the RRSP, there is no “buffer” over-contribution amount. If you over-contribute, you will have to pay a penalty of 1% per month on any excess. This 1% per month will add up fast, so if you even think you may have over-contributed, you’re better off investigating right away. 

Question: What is the current lifetime TFSA contribution maximum? 
Answer: If you are the age of majority in your province of residence since 2009, have been a Canadian resident the entire time, and have never contributed to a TFSA, your 2020 contribution limit is $69,500. We can help to determine your contribution limit if one or more of these stipulations does not apply to you (for instance: turned 18 in BC in 2014; already have a TFSA and have contributed; lived in Canada for some but not all years since 2009). 

Question: What happens to my TFSA space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use is carried forward indefinitely. 

Question: How much tax do I pay when I take money from my TFSA?
Answer: You don’t pay any tax on redemptions, or on any other aspect of the TFSA. 

Question: What about the growth in the TFSA. Surely I must have to pay some kind of tax?
Answer: No. This is truly about as straightforward as it gets. Growth is entirely tax-free. There are some exceptions to this rule but generally the exceptions apply to “professional investors”.  

Question: How many TFSAs can I have?
Answer: You can have as many accounts as you want, provided your aggregate contributions do not exceed your lifetime TFSA contribution limit. 

Question: How do I find my TFSA Contribution Limit?
Answer: You can get your “as of January 1st” TFSA space via the CRA website, but the CRA tabulates contributions for a given year once all financial institutions have uploaded contribution and withdrawal data. This means the CRA website can inaccurately reflect your true space in early months of a calendar year. 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Back To Basics: Tax-Free Savings Account (TFSA) appeared first on Smof Investment Manager, LLC.

Before we begin, we would like to extend our sincere wishes for a happy new year to you and your family. We would also like to thank to you for your continued trust in us and for the opportunity to assist you in working toward your financial goals. Should you have any questions about your investments or the market outlook for the coming year, please remember that we are just a phone call or e-mail away. 

The last 10 years saw unprecedented change in the wealth management industry. Investors and advisors had to quickly adapt to new products, more regulation, and improved technology. We wish to highlight four major themes in our industry that will contrast this decade with the last one. 

1. Returns will likely be lower, but still positive 

In 2010, Canadian and U.S. stock markets were just starting to rebound from the lows of the financial crisis. Today, these markets are at records highs and most market observers predict that returns for the next decade will not be as strong. Blackrock, one of the world’s largest assets managers, projects a return of 4% for a balanced portfolio in the 2020s, compared to 7% for the 2010s.   

This news should not come as a major surprise. Let’s look at the price/earnings (P/E) ratio, which is the most common metric for valuating stocks and markets. A P/E of 10 means the stock price is trading at 10 times the company’s annual earnings per share. The 25-year P/E average for the S&P 500 is about 16x earnings. In January 2010, the S&P 500 traded at 14x earnings and at the bottom of the financial crisis it traded at 9x. 

Today, it is currently trading at around 18x earnings.   

The chart below tracks the relationship between P/E ratios and historical 5-year rates of return. Simply put, the higher the valuation, the lower the projected 5 or even 10-year return. At current valuations,  history suggests a 5-year annualized return of 5.3% for the S&P 500. 

2. Investors will pay lower fees for their investments 

A positive theme for the next decade is that investors will pay less fees than ever before. 

The Management Expense Ratio (MER) is the total amount of fees investors pay to the fund manager (RBC, CI, BMO, Fidelity, etc.) and to the advisor. When I started working at Smof Investment in 2009, the MER for a growth-oriented portfolio was approximately 2.5% or more. With a 2.5% MER, a mutual fund whose basket of stocks returns 9% for the year results in an after-fee return of 6.5% to the investor. 

Thankfully, due to increased regulation and fiercer competition, fees have come down substantially. Today, MERs are commonly between 1.2% to 2.2% or 0.9% to 1.9% for higher net worth investors. Using the same example as above, a mutual fund whose basket of stocks returns 9% now results in a return of between 7% and 8% to the investor.  

3. A multi-factor strategy will be incorporated to portfolio construction

Today, most industries offer more diverse and customized product options than ever before. The investment industry is no different.  

An investment trend that has already started – but will likely grow in popularity in the next few years – is the multi-factor portfolio. In addition to well–known factors such market cap, value or dividend, there are now investment funds with volatility, quality and momentum factors built in.   

These additional factors will increase customization and risk-management in a portfolio and facilitate an advisor’s ability to tie investments to market cycles. 

For even further diversification and customization, portfolios will also be built with a mix of passive and active mandates. Passive investments aim to mimic the holdings and returns of a certain index (like the TSX or S&P 500) and are known for their low fees. Active funds are the mutual funds we are most familiar with. These are run by a portfolio manager and aim to meet or exceed the return of their respective benchmark index and whose holdings may look very different than the index. Incorporating both passive and active investments in a portfolio has the potential to increase diversification and lower risk. 

4. Technology will improve the user experience  

In the last several years, our dealership has launched the following initiatives:

• Nominee accounts that simplify administration for switches, transfers, redemptions and purchases 
• The ability to self-fund your account by making a bill payment in online banking 
• Improvements to the Wealthview online portal 
• Consenting electronically (digital signatures) to account changes 

These measures are aimed to simplify, automate, or accelerate a client’s ability to transact on their accounts. The next decade will build on these ideas and see more innovations aimed toward improving the client experience while streamlining administration.
 

Sources: Blackrock, J.P. Morgan, Fidelity 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post New Decade, New Expectations appeared first on Smof Investment Manager, LLC.

Here is where markets stand for 2019 (year-to-date return as of August 30. Foreign market returns are expressed in Canadian dollar terms):

–TSX (Canada): 14.8%
–DOW Jones (U.S.): 10.5%
–S&P 500 (U.S.): 13.9%
–FTSE 100 (UK): -0.4%
–DAX (Germany): 7.5%
–MSCI EAFE (Europe and Asia markets): 4.6%
–MSCI World (Aggregate of all global markets): 10.8%
–TMX Canadian Universe Bond: 8.7%

Following last fall’s decline, stock markets experienced a v-shaped recovery from January to June 2019. The ‘Powell pivot’ (the U.S. Federal Reserve Chairman’s change in approach to monetary policy) and hopes of more Chinese fiscal and monetary stimulus and the end of the trade war were the primary reasons behind the recovery.

U.S. indices continue to hover near all-time highs despite the uncertainty created by the U.S.-China trade dispute, growing trade protectionism, Brexit, the weakening euro zone, and other macro and geopolitical risks. Although the U.S. economy remains stable, there are signs of the global economy slowing and corporate earnings growth trends continue to decline.

We generally do not recommend any attempts to time the market by making drastic portfolio changes. However, there are tactical moves investors can make to position their portfolio more defensively while maintaining their overall asset mix, if their situation calls for it. For example, those who plan on retiring or drawing heavily from their portfolio in the next few years should reposition their portfolio accordingly.

If you are behind on your financial news, here are a few links to get you caught up:

Smof Investment Articles

2019 Mid-Year Outlook

Yield Curve Inversion and 800-Point DOW Drop

Odette & Terry got married!

Other Useful Articles

Will a trade war push the U.S. economy into a recession?

Defensive investing has paid dividends in down markets

We hope you find our September newsletter articles useful. As usual, everyone’s situation is unique and there is no single solution for everyone. If you have questions or concerns about your investments, please feel free to contact us.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Our September 2019 E-Newsletter Is Here! appeared first on Smof Investment Manager, LLC.

Here are the key facts:

• Annual maximum contribution: $2,500 (or $5,000 if you have carry-forward room) per child
• Matching annual grant: 20%, or $500, if you make a $2,500 contribution
• Maximum lifetime grant: $7,200 per child (would require $36,000 in contributions)
• Maximum lifetime contributions: $50,000 per child
• BC Training and Education Savings Grant: One-time $1,200 government grant (no contribution required) for BC children between ages 6-9
• Tax-Sheltered Growth
• Same investment options as an RRSP or TFSA
• Account can stay open for 35 years from the date it was opened
• Funds can be accessed when child attends post-secondary. If child never attends post-secondary, the grant will have to be repaid. The growth can be rolled over to RRSP (room permitting). The contributions can be fully refunded
• Definition of post-secondary enrolment is flexible (university, college, technical school, community colleges, trade schools…)
• Withdrawals require proof of enrolment, but you do not need to justify what the funds will be used for
• Any withdrawals are taxed in the hands of the child. Only grant / investment growth is taxed. Contributions are not taxed

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Back to Basics: Registered Education Savings Plan (RESP) appeared first on Smof Investment Manager, LLC.

2019 Mid-Year Outlook

During this time of year, most investment firms release a mid-year or 3rd quarter market outlook. As usual, some indicators are supportive of a rising market, while others are not. We’ve culled all these outlooks into the following short summary:

Big Picture – Central Bank Activity: Markets experienced a quick recovery following last fall’s pullback. The U.S. Federal Reserve’s (the Fed) decision to pause rate increases and allow for lower-for-longer rates are extending this economic cycle. Central banks from around the world are either following suit or have resumed/revived stimulus measures.

The market expectations are for the Fed to cut rates by 0.50% to 0.75% by the end of 2019. This will be supportive for both equity and fixed-income markets.

Big Picture – U.S. / China Politics: U.S. President Donald Trump’s tariff increase on Chinese imports in May halted this year’s equity market recovery. While the stock market has since rebounded, the lasting impact can be seen in falling long-term government bond yields, the inverted U.S. yield curve, the slowdown in global trade and weak global manufacturing numbers.

The current consensus on the yield curve inversion is to see if it persists for a few more months before taking it seriously. A combination of Fed easing, China stimulus, and trade compromise could make the recent inversion a false signal.

Big Picture – Corporate Profits: Late-cycle conditions are mounting. Rising wages will put pressure on profits, plus a flood of corporate debt could pose problems when the tide turns. Increasing wages inevitably put pressure on profit margins and trigger market volatility.

Europe / Brexit: The ongoing Brexit uncertainty continues to weigh on the British economy. Analysts believe the British Pound Sterling will remain volatile in the short-term, but a rebound in the currency looks likely if the UK’s new Prime Minister can secure a deal with Europe, or if a second referendum is called.

But don’t give up on the UK / Europe. The U.S. has rallied over 300% since the bottom of the 2008 financial crisis. The International space has taken a little longer to catch up. On a relative valuation basis, international markets appear to be trading at a 20% discount to the US market or a 10% discount relative to their historical average:

Solution – Update your equity portfolio: Not all equities are equal. For example, a large-cap telecommunications or utility company will have very different risk/reward properties than an up-and-coming technology or mining firm. Different kinds of equities offer a range of characteristics beyond just risk and return. When an investor is in his/her working years, equities can take a more aggressive, growth-orientated approach. As an investor approaches retirement and eventually retires, the characteristics of equities within the portfolio can evolve, taking on a more defensive, equity-income posture. The chart illustrates how equity allocation can be re-characterized over time, in order to pursue investor objective.

Solution – Keep emotions in check and stay the course: Investor psychology tends to creep in when markets are volatile. A bias of loss aversion can influence investors to want to cash out; however, staying the course over the long term has proven to be the better option, historically.

Solution – Ignore the forecasts: There are many credible and educated sources out there, but no one can accurately and consistently predict the future.

At the beginning of 2019, The Wall Street Journal surveyed economists to predict where interest rates would be in June and December of 2019. The graphic below charts these predictions (orange lines) with the actual yield (black line). As you can see, no one came close to predicting the dramatic decline in rates.

We want to keep you informed and educated, but we concede that we don’t know what will happen tomorrow or next year. For this reason, we promote setting a long-term asset allocation, weathering pullbacks and investing in quality companies as being the keys to investment success.

Table: Actual Yield on the 10-year Treasury (black line) Note versus January 2019 analyst predictions (orange lines)

Conclusion: Central bank policy and current valuations suggest equity funds may have room to run, but be ready for a bumpy ride. Investors should expect more late-cycle volatility. It’s not too early to prepare portfolios for rougher seas ahead.

Companies that load up on debt to cover share buybacks and dividends are susceptible to dividend cuts (and stock price declines) when times get tough. In an environment of slowing growth, it makes little sense to invest in feast-or-famine businesses because the feast may be some time away. Higher quality companies are always our preference and we are putting further emphasis on companies with high profitability, returns on invested capital, better balance sheets and better cash generation.

Sources: Capital Group, Dynamic Funds

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post 2019 Mid-Year Outlook appeared first on Smof Investment Manager, LLC.

Measures for Individuals

Home Buyers’ Plan Withdrawal Limit Increase

The home buyers’ plan (HBP) allows first-time home buyers to withdraw up to $25,000 from a registered retirement savings plan (RRSP) to purchase or build a home without having to pay tax on the withdrawal.

Budget 2019 proposes to increase the HBP withdrawal limit to $35,000 from $25,000. As a result, a couple will potentially be able to withdraw up to $70,000 from their RRSPs to purchase a first home. This increase will apply to the 2019 and subsequent calendar years.

Also, the “first-time home owner” condition is removed for individuals that separate and live apart due to a breakdown of a marriage or common-law relationship.

Stock Option Limitations

The government is proposing to limit the capital gains deduction for employees of large, long-established, mature firms to $200,000 per year based on the fair market value of the underlying shares. The government has proposed limits to stock option benefits. Currently, it is possible for employees to pay tax at capital gains rates on employment stock options when certain conditions apply.

Canada Training Credit

Effective for 2019 and subsequent taxation years, the budget proposes to introduce the Canada Training Credit, a refundable tax credit to assist working Canadians with the cost of professional development. The credit is the lesser of eligible tuition and a new notional account. Eligible individuals will accumulate $250 each taxation year in a notional account.

To be eligible individuals must:

• file a tax return for the year;
• be at least 25 years old and less than 65 years old at the end of the year;
• be a resident in Canada throughout the taxation year;
• have net income under the third federal bracket $147,667 (for 2019)

The lifetime maximum is $5,000, which expires the year an individual turns 65 years of age. The federal tuition 15 per cent non-refundable tax credit will still be available on the difference between the eligible tuition fees and the refundable Canada Training Credit.

EI Training Support Benefit

This benefit is expected to be launched in late 2020. It will be available through the EI program and will provide up to four weeks of income support, every four years. This support will be paid at 55% of a person’s average weekly earnings and is designed to help workers cover living expenses while on training.

Digital News Subscriptions

A new non-refundable tax credit of up to $500 for subscriptions paid in a year to a qualifying Canadian journalist organization – a tax savings of $75 per year. This credit is available for the years after 2019 and before 2025.

Registered Disability Savings Plan – Cessation of Eligibility for the Disability Tax Credit

The 2019 Federal Budget proposes to eliminate the medical certification requirement including the requirement to close the account when the individual loses the disability tax credit. This will help retain the grants and bonds in the account that would under the current rules be required repaid to the Government. In addition, a tax-deferred rollover of a deceased parent or grandparent’s registered retirement account (RRSP/RRIF) will be permitted until the end of the fifth calendar year following the loss of the DTC which is not allowed under the current rules.

The 2019 Federal budget also proposes to creditor protect RDSP’s from seizure in bankruptcy, except contributions made 12 months prior to filing.

If an RDSP beneficiary becomes DTC ineligible the issuer will not be required to close the account on or after March 20, 2019.

First-Time Home Buyer Incentive

The federal government’s major housing announcement is a $1.25-billion, three-year program of zero-interest loans for low- and middle-income people looking to buy their first home. The incentive is subject to various conditions, including that buyers have a household income below $120,000 a year.  CMHC will release full details later this year, with the loans available in September, pending passage of legislation.

Eligible first-time home buyers could finance part of their purchase through a shared-equity mortgage with CMHC. The incentive is for insured buyers – those who make a down payment of less than 20 per cent. It would reduce a buyer’s total borrowing costs and therefore their monthly mortgage payments.

The budget offered an example of how the incentive would work. For a $400,000 home purchase, an insured buyer must have 5 per cent (or $20,000) for the down payment. For a new home, a shared-equity mortgage would offer $40,000, lowering the total borrowing costs to $340,000 from $380,000. The incentive would be repaid when the home is sold.

Source: Federal Budget 2019

Improved Rental Options

To provide more affordable rental options for middle-class Canadians, Budget 2019 proposes to provide an additional $10 Billion over nine years in financing through the Rental Construction Financing Initiative, extending the program until 2027–2028.

Automatic CPP Enrolment at Age 70

According to the government, approximately 40,000 people 70 or older are currently not enrolled in the Canada Pension Plan, meaning they aren’t receiving a monthly retirement pension (the budget calculates that this would be $302 a month on average in 2020). The budget is proposing to proactively enroll eligible seniors at age 70 so they don’t miss out on their CPP benefits.

Guaranteed Income Supplement Threshold

The government is also proposing an increase to the guaranteed income supplement (GIS) earnings exemption for low-income seniors, from $3,500 to $5,000. In practice, this means seniors receiving the GIS will be able to exempt $1,500 more in income each year before clawbacks.

Measures for Corporations

Enhanced Zero-Emission Vehicle Depreciation
For vehicles purchased by a corporation for use in business activities, there is a 100% write-off of the cost (to a maximum of $55,000) in the year of acquisition. This treatment is available for purchases between March 19, 2019 and January 1, 2024. A significant increase in the write-off compared to the typical 30% which was capped at a cost of $30,000.

EI Training
Budget 2019 proposes to introduce an EI Small Business Premium Rebate. Starting in 2020, any business that pays employer EI premiums equal to or less than $20,000 per year, would be eligible for a rebate to offset the upward pressure on EI premiums resulting from the introduction of the new EI Training Support Benefit.

Increased Support for Canada Revenue Agency

The budget announced increased funding for CRA including:

-An additional $150.8 million to combat tax evasion and aggressive tax avoidance through hiring additional auditors, creating a new data quality examination team to ensure proper withholding, remitting and reporting of income earned by non-residents, and extending programs aimed at offshore non-compliance.

– An additional $50 million over five years, starting in 2019–2020, to create four new dedicated residential and commercial real estate audit teams in high-risk regions, notably in British Columbia and Ontario, to ensure that tax provisions regarding real estate are being followed, with a focus on ensuring that:

• Taxpayers report all sales of their principal residence on their tax returns;
• Any capital gain derived from a real estate sale, where the principal residence tax exemption does not apply, is identified as taxable;
• Money made on real estate flipping is reported as income;
• Commissions earned are reported as taxable income; and
• For Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, builders of new residential properties remit the appropriate amount of tax to the CRA.

The post 2019 Federal Budget appeared first on Smof Investment Manager, LLC.

How did markets do in 2018?

After an unusually calm year of solid performance for capital markets in 2017, investors experienced a much bumpier ride in 2018. Downward volatility resurfaced in the first quarter, and though markets moved generally higher through the summer months, a sharp sell-off in the fourth quarter meant that most asset classes registered negative returns for the year. For Canadian investors in foreign markets, losses were mitigated somewhat by the weakness of the Canadian dollar, which declined about 8% relative to the U.S. dollar for the year.

U.S. equities posted some of the best results among global assets in 2018, with the S&P 500 Index reaching an all-time high and setting a record for the longest bull market on record in the third quarter. After the fourth quarter sell-off, however, the index finished the year with a loss of 4.4% (a gain of nearly 4% in Canadian dollar terms).

Canada’s S&P/TSX Composite Index, meanwhile, was weighed down by themes that included plunging energy prices as well as weakness in materials and financial services. The Canadian benchmark finished the year with a loss of 8.9%. The MSCI World Index, a broad measure of developed market equities, fell 8.2% in U.S. dollars (-0.2% in Canadian dollars).

Central banks in North America continued to gradually raise interest rates throughout 2018. 10-year U.S. and Canada government bond yields rose and peaked early in the fourth quarter but fell through November and December to end lower for the year. The FTSE TMX Canada Universe Bond Index, which broadly reflects results for the Canadian government and investment-grade corporate bond market, gained about 1.4% over the 12-month period.

What’s in store for 2019?

In contrast to last year’s consensus outlook that pointed to a synchronized global economic expansion, many experts now believe we are in the late stages of the economic cycle, with global growth slowing and downside risks increasing. Nevertheless, developed economies are expected to grow throughout the coming year and inflation remains moderate. Global interest rates are still low by historical standards, allowing corporations the flexibility to strengthen their balance sheets and invest in their businesses. These conditions suggest a cautiously optimistic outlook for markets in 2019.

Economy: Although markets decreased last quarter and the yield curve has flattened (interest rates of short and long duration bonds have narrowed – seen as a leading indicator of a recession), the consensus is that there is a low chance of a recession occurring 2019‐2020. Strong economic fundamentals, combined with expansionist fiscal policy and accommodating monetary policy, should make for prolonged U.S. business expansion and above trend growth in 2019 (+2.4% expected versus about 3% seen in 2018).

Regarding the global economy, a deceleration of economic growth (around 3.3% in 2019 versus a projected 3.7% in 2018) is likely given the deceleration underway in China and geopolitical uncertainties (Brexit in Europe, U.S. Government shutdown, etc.).  

Equities: Assuming there are positive developments in U.S.-China trade negotiations and a more pragmatic Fed, the volatility observed since last quarter should gradually reduce in the first half of 2019. History has shown that in the absence of a recession, Wall Street should recover a significant portion of the recorded losses (‐19.8% since its peak) within a reasonable period (between 9 and 12 months).

Interest rates: Due to the recent tightening of financial conditions (drop in equities and corporate bonds), the Federal Reserve should take a pause in the first half of 2019, even more so as its current leading rate has basically moved back close to the “neutral” zone and inflationary pressures remain muted.  The Bank of Canada should be more active given the delay in its interest rate normalization process.  

Currencies: With the Fed temporarily taking to the sidelines and given the scope of budget and foreign imbalances (close to 8% of the U.S. GDP), downward pressure on the U.S. dollar should gradually increase in 2019. At the same time, the Canadian dollar should rebound closer to 80 cents U.S., even more so because the Bank of Canada should continue to normalize its rates.   

Investment strategies: In the absence of a recession, equities should outperform government bonds in 2019. At current valuation levels, the Canadian market offers a better risk‐return ratio than the U.S. market. From a simple forward price-earnings standpoint, it is estimated that the Canadian market is trading at a 10% discount versus the U.S. market. Also, the dividend yield of the S&P/TSX is 2.8%, which is almost 1% higher than the S&P 500. 

For the fixed-income sleeve, reduce exposure to corporate bonds due to tightening credit conditions and the increased cost of loans to corporations. Increase exposure to government bonds, which are now offering positive real yields after years of low interest rates.

The bottom line: A lot of bad news was priced in during last quarter’s 20% market decline, which tells us that any positive surprise (like the Fed slowing down its remaining rate hikes or a faster than expected resolution to the U.S.-China trade dispute) could lift the market.

It can be difficult to set aside short-term distractions and maintain a long-term perspective when negative headlines dominate as they have in recent weeks. But looking back over the longer term, the most recent market decline may simply be a small setback in a strong run upward overall. From its lows reached following the financial crisis in March 2009 to the end of last year, for example, the S&P 500 was still up more than 270%.

The fact is, market volatility is not always a bad thing. Portfolio managers often welcome market declines as a necessary ingredient for positive returns as it creates opportunities to add to existing positions or buy higher-quality businesses at reduced prices. In 2017, asset prices remained elevated, providing few opportunities to shop for “bargains.”

We believe the most important action to take as an investor is to create a sound, diversified investment plan that takes your time horizon and tolerance for risk into account, and then to stick to that plan through periods of short-term volatility. As asset classes do not typically perform in a correlated fashion, diversification can help to insulate your portfolio from the highs and lows and provide a smoother experience over time.

If you have any questions or concerns about your investments, or if your personal circumstances have changed, please do not hesitate to contact our office.

Sources: CI Investments, IA Clarington

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post 2018 Wrap-Up and 2019 Outlook appeared first on Smof Investment Manager, LLC.

Weekly Update – So Long, 2018

For the last time in 2018, we will leave you with our tax- and investment-related strategies. We compiled a list of investment, RRSP, business, and child-related planning tips to cover before the end of the year.

On behalf of all of us here at Smof Investment to you and your families, we’d like to wish you a very Happy New Year!

Investing

• Portfolio mix. Different investments are taxed at different tax rates. If you invest in both registered and non-registered accounts, ensure your portfolio mix is optimized for tax-efficiency.
• The amount added to the TFSA room on January 1st, 2019 will increase to $6,000, bringing the lifetime total to $63,500. Consider putting funds into your TFSA to the extent you can make contributions (or via a transfer from your non-registered account). Ensure you don’t exceed your contribution room due to the significant penalty on over-contributions. If you have authorized us for CRA access, we can confirm your TFSA limit.
• If you were planning on withdrawing from your TFSA, do so by the end of the year. The amount you withdraw will be added to your TFSA room at the start of 2019. If you withdraw in January 2019, you won’t get the room back until January 2020.
• If you have investments in a non-registered account in a capital loss position, consider triggering the capital loss to offset capital gains realized during the year.
• For non-registered accounts, delay purchases until January 2019 to minimize your allocation of taxable income for 2018.

Taxes

• Any donations you want to claim on your 2018 tax return must be made by December 31, 2018.  Donations must be made to a registered charity. Contributions above $200 result in a 29% federal tax credit. Keep the donation receipts!
• If you are a first-time donor, you can claim an additional 25% credit on up to $1,000 of donations made after March 20, 2013.  2017 is the final year in which this credit can be claimed.
• Public transit tax credit. This credit was fully eliminated following the 2017 tax year. You do not need to keep bus passes to declare on your tax return anymore.
• If you are over 65 with no private pension, consider withdrawing $2,000 from a RRIF account to trigger the $2,000 pension credit.
• For seniors or those eligible for the disability tax credit (DTC), renovations to make a home accessible qualify for the non-refundable home accessibility tax credit—worth up to $1,500.

RRSP

• The deadline to make an RRSP contribution for the 2018 tax year is March 1, 2019. If you have authorized us for CRA access, we can confirm your RRSP limit, factoring in any contributions you’ve made with us. An RRSP contribution has a tax savings potential of anywhere between 20%-47.7% for BC residents.
• If you turned 71 this year, this is the final year you can contribute to an RRSP. Consider making an RRSP contribution in December of the year you turned 71 if your income in 2017 is higher than what you expect in later years.
• If you turned 71 this year, you must wind up your RRSP by the end of the year. For most people, this means a conversion to a RRIF account with minimum annual withdrawals starting the following year.
• Consider withdrawing funds from your RRSP if you have low income for the year.

Self-Employment / Business / Corporations

• The Tax On Split Income (TOSI) rules were implemented in 2018.  There is now limited ability to pay dividends to family not directly involved in the business
• However, there are exceptions.  For example, family members who are shareholders and work in the business on average at least 20 hours per week are exempt from TOSI.  If a shareholder’s over 24 and owns at least 10% of the votes and value of the shares, then the TOSI rules don’t apply.
• Also affecting business-owner clients are new rules for passive investment income effective for tax years after 2018, including a reduction in the small business deduction (SBD) for Canadian Controlled Private Corporations (CCPC) with passive investment income between $50,000 and $150,000. The SBD is reduced to zero at $150,000 of investment income.
• One suggestion to reduce passive income by December 31 is to ensure you are taking enough money to maximize RRSP and TFSAs.  Income of about $147,000 at 18% results in the maximum 2019 RRSP contribution of $26,500.

Children

• If you have a RESP and your child has turned 17 in 2018, this is the final year of his/her grant eligibility.  If you have grant room remaining, you can contribute up to $5,000 in the final year, generating a $1,000 grant.
• Pay child-care expenses for 2018 by December 31st, 2018 and get a receipt. Remember that boarding school and camp fees qualify for the child care deduction.
• If your child qualifies for the disability tax credit, and if RDSP assets or income will not disqualify him/her from receiving provincial income support, consider setting up an RDSP to qualify for the Canada Disability Savings Bond (CDSB – lifetime maximum of $20,000 per child). Contributions to an RDSP qualify for the Canada Disability Savings Grant (CDSG – lifetime maximum of $70,000 per child)
• Children’s fitness and art credit. These credits have been phased out and you won’t receive a credit for these costs on your 2018 return

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – December 28, 2018 appeared first on Smof Investment Manager, LLC.

Weekly Update – Re-Iterating Our Year-End Financial Planning Checklist

With only a few more days left in 2018, it is a good time to revisit tax- and investment-related strategies. We compiled a list of investment, RRSP, business, and child-related planning tips to cover before the end of the year.

On behalf of all of us here at Smof Investment to you and your families, we’d like to wish you a very Merry Christmas, Happy Holidays and a wonderful New Year!

Investing

Portfolio mix. Different investments are taxed at different tax rates. If you invest in both registered and non-registered accounts, ensure your portfolio mix is optimized for tax-efficiency.

The amount added to the TFSA room on January 1st, 2019 will increase to $6,000, bringing the lifetime total to $63,500. Consider putting funds into your TFSA to the extent you can make contributions (or via a transfer from your non-registered account). Ensure you don’t exceed your contribution room due to the significant penalty on over-contributions. If you have authorized us for CRA access, we can confirm your TFSA limit.

If you were planning on withdrawing from your TFSA, do so by the end of the year. The amount you withdraw will be added to your TFSA room at the start of 2019. If you withdraw in January 2019, you won’t get the room back until January 2020.

If you have investments in a non-registered account in a capital loss position, consider triggering the capital loss to offset capital gains realized during the year.

For non-registered accounts, delay purchases until January 2019 to minimize your allocation of taxable income for 2018.

Taxes

Any donations you want to claim on your 2018 tax return must be made by December 31, 2018.  Donations must be made to a registered charity. Contributions above $200 result in a 29% federal tax credit. Keep the donation receipts!

If you are a first-time donor, you can claim an additional 25% credit on up to $1,000 of donations made after March 20, 2013.  2017 is the final year in which this credit can be claimed.

Public transit tax credit. This credit was fully eliminated following the 2017 tax year. You do not need to keep bus passes to declare on your tax return anymore.

If you are over 65 with no private pension, consider withdrawing $2,000 from a RRIF account to trigger the $2,000 pension credit.

For seniors or those eligible for the disability tax credit (DTC), renovations to make a home accessible qualify for the non-refundable home accessibility tax credit—worth up to $1,500.

RRSP

The deadline to make an RRSP contribution for the 2018 tax year is March 1, 2019. If you have authorized us for CRA access, we can confirm your RRSP limit, factoring in any contributions you’ve made with us. An RRSP contribution has a tax savings potential of anywhere between 20%-47.7% for BC residents.

If you turned 71 this year, this is the final year you can contribute to an RRSP. Consider making an RRSP contribution in December of the year you turned 71 if your income in 2017 is higher than what you expect in later years.

If you turned 71 this year, you must wind up your RRSP by the end of the year. For most people, this means a conversion to a RRIF account with minimum annual withdrawals starting the following year.

Consider withdrawing funds from your RRSP if you have low income for the year.

Self-Employment / Business / Corporations

The Tax On Split Income (TOSI) rules were implemented in 2018.  There is now limited ability to pay dividends to family not directly involved in the business

However, there are exceptions.  For example, family members who are shareholders and work in the business on average at least 20 hours per week are exempt from TOSI.  If a shareholder’s over 24 and owns at least 10% of the votes and value of the shares, then the TOSI rules don’t apply.

Also affecting business-owner clients are new rules for passive investment income effective for tax years after 2018, including a reduction in the small business deduction (SBD) for Canadian Controlled Private Corporations (CCPC) with passive investment income between $50,000 and $150,000. The SBD is reduced to zero at $150,000 of investment income.

One suggestion to reduce passive income by December 31 is to ensure you are taking enough money to maximize RRSP and TFSAs.  Income of about $147,000 at 18% results in the maximum 2019 RRSP contribution of $26,500.

Children

If you have a RESP and your child has turned 17 in 2018, this is the final year of his/her grant eligibility.  If you have grant room remaining, you can contribute up to $5,000 in the final year, generating a $1,000 grant.

Pay child-care expenses for 2018 by December 31st, 2018 and get a receipt. Remember that boarding school and camp fees qualify for the child care deduction.

If your child qualifies for the disability tax credit, and if RDSP assets or income will not disqualify him/her from receiving provincial income support, consider setting up an RDSP to qualify for the Canada Disability Savings Bond (CDSB – lifetime maximum of $20,000 per child). Contributions to an RDSP qualify for the Canada Disability Savings Grant (CDSG – lifetime maximum of $70,000 per child)

Children’s fitness and art credit. These credits have been phased out and you won’t receive a credit for these costs on your 2018 return

As always, please contact our office if you want to discuss these points in more detail.

Weekly Update – By The Numbers

North America

• The TSX closed at 13935, down -660 points or -4.52% over the past week. YTD the TSX is down -14.03%.
• The DOW closed at 22445, down -1656 points or -6.87% over the past week. YTD the DOW is down -9.20%.
• The S&P closed at 2417, down -183 points or -7.04% over the past week. YTD the S&P is down -9.61%.
• The Nasdaq closed at 6333, down -578 points or -8.36% over the past week. YTD the Nasdaq is down -8.26%.
• Gold closed at 1259, up -9.00 points or 1.53% over the past week. YTD gold is down -3.89%.
• Oil closed at 45.42, down -5.78 points or -11.29% over the past week. YTD oil is down -24.83%.
• The USD/CAD closed at 0.7353, down -0.0118 points or -1.58% over the past week. YTD the USD/CAD is down -7.54%.

Europe/Asia

• The MSCI closed at 1835, down -139 points or -7.04% over the past week. YTD the MSCI is down -12.74%.
• The Euro Stoxx 50 closed at 3001, down -92 points or -2.97% over the past week. YTD the Euro Stoxx 50 is down -14.36%.
• The FTSE closed at 6721, down -124 points or -1.81% over the past week. YTD the FTSE is down -12.58%.
• The CAC closed at 4694, down -160 points or -3.30% over the past week. YTD the CAC is down -11.65%.
• DAX closed at 10634, down -232.00 points or -2.14% over the past week. YTD DAX is down -17.68%.
• Nikkei closed at 20166, down -1209.00 points or -5.66% over the past week. YTD Nikkei is down -11.42%.
• The Shanghai closed at 2516, down -78.0000 points or -3.01% over the past week. YTD the Shanghai is down -23.92%.

Fixed Income

• The 10-Yr Bond Yield closed at 2.79, down -0.1000 points or -3.46% over the past week. YTD the 10-Yr Bond Yield is up 16.25%.

Sources: Dynamic Funds, Advisor.ca

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – December 21, 2018 appeared first on Smof Investment Manager, LLC.