Stop worrying about short term performance

Stop worrying about short term performance


As a financial advisor I see the financials of people from all walks of life. I see some people who have had amazing financial success. I also see people who are on the verge of bankruptcy.


There are always striking similarities between the various different people we work with. The one I want to write about today, is how often people focus on their short term investment performance, rather than focusing on the long term.


Short and long term investing


As I write this, we are a week away from a U.S presidential election. By all accounts it will drastically shift the way the world works depending on its results. Nearly every conversation or phone call I have with clients is them wanting to know how their investments will perform over the next 2 weeks to 6 months.


Why the rich pay lower tax rates

Why the rich pay lower tax rates


In case you haven’t heard, the rich get far more tax breaks then middle class Canadians. The problem is twofold, that tax deductions are based on your marginal rate, and how different sources of income are taxed differently.


Neither of these seem fair to most people, but it’s not my job to decide on what is fair and what isn’t. Rather my job is to understand it and educate anyone willing to listen.


To start, let’s look at why the rich get better tax deductions.


When you deduct anything off of your taxes, it saves you tax based on what your marginal tax bracket is. What this means is that someone who earns $70,000 will save 28.20%. While someone who earns over $220,000 will save 53.50%.


Let’s just assume Bob earns $70,000 and Sarah earns $220,000. They both have $10,000 in deductions they are going to claim on their taxes. Bob’s claim of $10,000 saves him $2,820 in taxes, while Sarah’s claim saves her $5,350 in taxes. Whatever deduction you have, saves you taxes based on your marginal tax bracket. Since Sarah is paying higher tax on her income, she also saves more by reducing her income through a deduction.


RESPs, How do they work?


If your goal is to save to help a child get an advanced education, there is no better method than the RESP.


The RESP, or Registered Education Savings Plan, is a tax-deferred investment account that the government will deposit grants into based on your contributions and income.



That sounds great, but it may not make sense to everyone, so I’ll explain it a bit better.


LEM: Labour Expense Multiplier

Labour Expense Multiplier


There are four primary issues in our economy which contribute to a continual rise in inequality:


  1. The global supply of cheap foreign labour, resulting in the outsourcing of jobs from developed nations to developing nations.
  2. How our current tax structure rewards investment and discourages the hiring of and desire to perform labour.
  3. The global race to the bottom in corporate tax rates.
  4. The rise in automation and replacement of labour.

It is my belief, that the following new expense multiplier can alleviate all four of the primary issues above.


Sequence of returns risk, what is it and how to manage it?

Sequence of returns risk can certainly be a retirees worst nightmare. Completely out of your control, and at the whims of the market.


To recap: sequence of returns risk is a portfolio risk that is based on the order of your returns, rather than your average return when in the decumulation phase of your investment strategy. You see, if you aren’t withdrawing, the order of your returns makes no difference, but if you are withdrawing the order of your returns makes a massive difference.


Let’s look at 4 simple examples. Each portfolio with $100,000 and averages 4.75% over the three yer period. The first will have no withdrawals and have bad returns first, the second will have no withdrawals and have good returns first. The third will have bad returns first with $10,000 per year withdrawn at the end of each year. The fourth will have good returns first with $10,000 per year withdrawn at the end of each year.

 No Withdrawals, Bad Returns First:


Table showing returns over the years



Emotional Capitulation and Your Investments


We all know that investments go up and they go down. The problem is how we handle the emotional roller coaster of watching our investments decline in value. As I am nowhere near qualified to act as a psychologist, my thoughts and ideas are my own as to why this happens. I base this on having watched hundreds of clients experience this dilemma and have even experienced it myself multiple times.


Everyone’s heard of the fight or flight response. It’s that fear response that picks up any time we feel threatened. This can be a physical threat, emotional threat, or in this case a financial threat.


When you see your investments going down in value, this fight or flight response kicks in. We have this instinctive reflex to try to avoid as much pain as possible. Our emotional response is to try to do something, sometimes anything, when the rational and logical strategy would be to simply stay put.


It’s why we move on from underperforming investments at the worst times and chase the high flyers even though we know we should never sell low and buy high. It’s why when the market is plunging we desperately attempt to time the market and sell out as it’s falling, with an illogical hope of timing the bottom and buying back in.



Then what can we do about it, and how do we avoid it?


Economic Collapse: A risk worth worrying about?



Economic Collapse. Yes, it’s a real risk, societies have risen and collapsed all throughout history. Each time the people thought this time was different and that they were too smart or knowledgeable to allow it to happen again. With a global pandemic shaking the world, fascism on the rise, and countries moving more towards isolation than cooperation, an economic collapse is a real risk.



The good news is it is not a risk worth worrying about. Why not? Well you can worry about it all day and accomplish nothing. The reality is it still has an exceptionally low probability of occurring. Since this is an investment related blog, let us discuss how it would impact your finances.


When clients discuss their investments with us, there is always that fear in the back of their mind that they might some how lose it all. A risk, which would only come to fruition due to an economic collapse so bad that our society never recovered from it. In this scenario, everything would be worthless. Yes, your stocks would be worthless, as would your house, your cash, your car, your gold, etc etc.



I like to explain this to people by using a rollercoaster metaphor about why you shouldn’t concern yourself with he risk of this happening, as you are subject to it whether you invest in the market or not.


The real value of a financial plan

financial plans and their real value


The number of new clients I work with who do not have a current financial plan, or who have never had a plan is astounding. The terms financial advisor, and financial planner have for whatever reason become synonymous with someone who simply picks your investments for you, and answers other financial questions if your lucky.


The basis of any financial planning, or financial advisor relationship is based on having a proper financial plan. After all, how can you determine how much you should be saving, how much risk you should be taking, and how much you need for your goals, if you haven’t created a plan?




The value of a financial plan is simple. It allows you to make informed choices about your financials, rather than guessing. For most people, they don’t know what difference it will make to their future if they save $500 a month or $750 a month. Since they don’t know, they can’t see the value. If you can’t see the value, you are far more likely to spend that additional $250 a month than you are to save it. On the opposite end of the spectrum, we see those who are so stressed and anxious about their money that they hoard it, refusing to take on any risk, and living an extremely frugal lifestyle unnecessarily.


The Three Primary Investment Risks

Three primary investment risks


When I sit down with new clients to discuss their financial goals, one of the most important parts of that conversation is how much risk they are comfortable taking. 9 times out of 10 the answer is somewhere along the lines of normal risk, or medium risk. The only reason I get this answer is because people don’t want high risk, and they know they need more than low risk. Oftentimes this is just the answer that makes the most sense to them, but they really don’t have a good understanding of what risks investing entails.


Today, I’m going to go over the three primary risk types of a properly diversified portfolio. I want to highlight the properly diversified portfolio part. If you are out there picking your own stocks, or you have a 20 stock portfolio, this is not applicable to you. Those portfolios are poorly diversified and have a magnitude of additional risks, with no additional upside. The three primary risk types of a properly diversified portfolio are: Economic Collapse, Emotional Capitulation, & Sequence of Returns risk.


Let’s start with the easiest to understand, and also the one least likely to matter. Economic Collapse. This risk is that something so major and powerful happens within the economy that you see the stock market & bond market effectively fail or drop to 0 in value. Believe it or not this is something a lot of people worry about. “What if I lose all my money???” The only way to lose all of your money is to have the market drop to 0 in value. The only way this could happen is if we have such a major event that capitalism collapses. With it, the North American economy, Europe, Asia, etc etc. This risk isn’t worth worrying about, purely because if this does play out nothing is going to have value anymore. Had you kept your money in the bank, under your mattress, or in gold bars, it wouldn’t matter. People will be fighting for survival and food and weapons will easily be the most valuable resources. In other words, if this happens, you’re screwed, but so is everyone else and there is nothing you could have done to avoid it. Only the doomsday preparers come out ahead in this scenario.



How to retire comfortably

How to retire comfortably


One life. One chance. Unfortunately, that also means you only get one chance to make sure you live a happy comfortable retirement.


You see, it is your choice whether you want to spend your retirement working as a greeter at Walmart, or if you would rather spend it traveling.


I’m going to show you how differences in your savings rate determines the success of your retirement.


I’ll look at three examples. The first individual, Joe, will save 5% of their after-tax earnings. The second individual, Barb, will save 10% of their after-tax earnings. Finally, the third individual Sam, will save 20% of their after-tax earnings. Let’s assume that all three of them earn $60,000 per year after tax, start saving at 30 years old, retire at 65, and live until age 90. We will also assume they all earn 6% on their investments while working and 4% on their investments in retirement.


Joe only saves 5% of his after-tax earnings, or $250 per month. By saving $250 per month for 35 years Joe manages to save up $345,073. He expects CPP of $1,175.83 every month and OAS of $613.53. Joe can also expect to be able to withdraw $1,800 per month from his investments until he passes at age 90. This sets Joe up for a gross retirement income of $43,072 every year.