Every time I had met with a bank or investment advisor it always started with “please fill out this questionnaire”. The questions are emotionally based and relied on the investor who did not have a market expertise to make decisions where someone with a market expertise should be making decisions.

We do this all the time. We tell our accountant what to do, we tell our dentist, doctor, lawyer and mechanic what to do. Then we wonder why the outcome isn’t what we had envisioned. It causes us more stress, buyers remorse and ultimately money.

Instead I let those professionals be the decision maker and I’m ultimately more happy even if it costs me more in the short term, long term I’ve won. This allows me to leave a legacy

Today we begin the conversation around managing your wealth like a pension fund rather than an individual. This begins the phase of removing the emotion and putting in fact based decisions. Here are the principles of this foundation:

  1. Remove the emotion
  2. Hire out the expertise and pay for it where necessary
  3. Have a plan
  4. Asset allocation is cash flow based on these two questions:
    • How much cash do you need?
    • When do you need it by?
  5. Investments are global in scope and not obligated to invest domestically
  6. Manage your cash flows like a business; Stop the leaks and spend where you get a return.
  7. Mitigate risks to ensure sustainability through self-financing or insurance
  8. Shop your financing and find the best vendors. This is closely related to #6.

Under this framework we go forward with the following:  

  • Market overview
  • Managing cash flows
  • Protect you vault
  • Shop the debt: Owning a rental

Market overview:

The S&P 500 continues to perform better than the TSX year to date and while the market is a voting machine, I like the economics of the US better relative to Canada. Canadian 5 year bond yields, German and UK 10 year bond yields all rose in April while the US yields remained relatively flat. Trading volume for many of the positive days were low which I see as a lack of conviction to higher equity prices.

Canadian economic data continues to surprise me with solid housing starts, inflation being acceptable, strong jobs and good retail sales numbers. Canada’s GDP growth was a little weak and the overhang of consumer and corporate debt in Canada remains a major concern for me. I continue to hold the belief that Canada will have a limited upside economic growth due to the consumer however could benefit from global US and global growth, particularly in the resource market and more so if Canada figures out a compromise to improve the export of oil. Should the US and global growth slow or go into a recession I expect pain to be felt at home.

Canada has effectively reduced the risk to its federally regulated financial institutions such as the major banks by making mortgage lending more strict. A number of other players have stepped in to service that need for the consumer and there has been significant growth in the private mortgage market.

I talk more about it in my podcast about shadow banking in Canada: https://tkdale.com/2019/04/25/shadow-banking-in-canada/

The US continues to be a strong economy as it’s growth rate came in strong at 3.2%, inflation seems to be in a sweet spot of weak enough not to warrant interest rate increases but not weak enough to cause economic concerns. Housing was still down year over year and wage increases still are muted however the muted wage growth could be due to non-historical influences.

There was strong jobs reports and growth in employment and non farm payrolls with the unemployment rate at 3.6%, the lowest since December 1969. Interestingly the lowest on record was May of 1953 at 2.5%.

In China, manufacturing eased slightly however there are expectations that the stimulus that China has implemented since the beginning of the year are starting to take effect. Trade tensions continue to be in motion and the longer they drag on, the more cumulative they drag on economics. Markets had largely priced in a resolution and given the increased rhetoric, there is a fair amount of volatility as of the time of this writing.

In Germany retail sales were very weak while manufacturing rebounded slightly albeit still in contraction territory. The European Commission cut its growth forecast for Germany to 0.5% in 2019 from an expected 1.1%. This is very weak as a desired level of growth would be closer to 3% and the direction is desired to be moving towards 3% rather than away from it.

Overall EU growth expectations was reduced and while manufacturing has improved slightly, it still remains in contraction territory. Inflation has improved and overall we get a mixed picture.

Portfolio Positioning

We remain focused on a tilt toward equities, with a focus on US and German equities while avoiding Canadian equities. For bonds we remain focused on shorter term maturity investments.

Managing Cash Flows
While many are doing spring cleaning and getting out the summer lawn furniture, we should take some time on a rainy day to do a spring financial cleaning. The first quarter is behind us and many are thinking of cottages, docks and margaritas. People from all economic backgrounds would benefit from reviewing the last 3 months bank and credit card statements to see if there are any recurring payments or recurring themes that you don’t find necessary. Cut out those expenses and feel as good as you do about that margarita on a dock in Muskoka.

Protecting Your Cash Vault
It is expected that 1 in 2 Canadians will contract some form of cancer in their lifetime. Further it is expected that 1 in 4 will die from cancer. Having said that, the death rates from cancer have decreased considerably since 1988 to 2017 by 32% for males and 17% for females.

What does this mean? It means that people are getting cancer and that you are more likely to survive it. This means that you may have to take time off from work which is a hit to the earnings potential, you may need to use considerable savings as some drugs may cost tens of thousands of dollars per year.

There are cost effective ways for people in their 50’s to get affordable coverage. For as little as $140 per month you can get a $100,000 payment for critical illness that will alleviate much of the stress and pressure that is put on families in this concerning time.

Many of us, myself included, are dealing with parents who require long term care unprepared for the financial and time burden that it puts on their children. I am determined not to put this burden on my children. A critical illness policy that is convertible to a long term care policy is a simple, effective way to mitigate these risks that we all face and come with a number of fail safes such as the return of premiums.

Yes, the premiums. It does seem like a gamble. You pay out this money and may never need it. Here is the beautiful part about this coverage. You can get provisions that would have all of the premiums repaid to you if you don’t claim it. Say for example you die before claiming the critical illness then you can get a provision that refunds all of the premiums. You can also get a provision put in place that refunds all of the premiums if you cancel the coverage after a certain age or having the policy for a specified number of years.

Even better is that you can convert this policy into a long term care policy which pays a weekly benefit for you to supplement your income. Starting at $150 per week up to $2,300 per week.

Check out the example here: Critical Illness Illustration

Shopping Your Debt: Owning a rental
One of the biggest complaints that I’ve had from rental property owners is that they are taxed on the revenues minus expenses for rentals however their cash flows often repay the principal of a mortgage. This reduces the cash flow available and causes a mismatch from cash flow to taxes owed.

One of the ways to reduce this is to get an interest only mortgage. It allows you to deploy the cash elsewhere and use it for other business means rather than having to refinance debt all the time to access that equity. Cash can be built up and applied towards other cash generating assets and the process of refinancing one or multiple properties is reduced.

For people with rentals this is one area for consideration.

Take Aways:

  1. Think about cash flows as the basis for establishing the mix between stocks and bonds.
  2. Think globally without an obligation to be focused on investing where you live.
  3. Look to pay for things that either produce a return or mitigate large risks.
  4. Consider an interest only mortgage for your rental property.

If you got through this long article, then send an email to info@tkdale.com and let us know how you’ve:

  1. got an idea of what your cash requirement in retirement will look like
  2. how you are unbiased in your investment approach and
  3. how you’ve cut expenses to increase your savings.

Trevor Dale is licensed to discuss and deliver on solutions for investments, insurance and mortgages. Give us a call for a free consultation.

Until next time.

Trevor Dale, CFA