A DOUBLE SILVER LINING

High inflation and interest rates, which we have been experiencing for some time, generally are not good for asset prices. But, in this environment there is a silver lining. Two of them, actually, which are making it a lot easier for our clients meet their financial plans’ targeted rate of return:

1.We are able to buy bonds and GICs that are paying in excess of 5%, which is the highest in well over a decade (Government of Canada 10-year bond yield).

2. In our equity portfolios, we favour companies that pay growing dividends, which are a hedge against inflation.

Of course, dividends are just one of many criteria that make up our stringent, long-time investing philosophy, which is to invest in companies:

-Predominantly in regulated industries

-With strong balance sheets

-That have predictable, recurring revenues

-That run businesses we clearly understand

Above all, we focus on preservation of capital. We strive to balance offence and defence: we buy companies that we believe are trading at a price below what we think is intrinsic value, which therefore gives us a significant margin of safety. Our portfolios are not the market, but instead are customized to each client. A full explanation of our equity and fixed income philosophy is here on our website.

Back to the importance of tax-efficiency, something we always focus on intensely. Simply put, whatever your returns are, what matters most is what your returns are after tax and inflation. A key determinant of tax-efficiency is asset allocation. This graph tells the story well.

FRIENDS AND FAMILY

While our clients are assured of having tax-efficient portfolios, many of the friends and family they refer to us are not receiving this same crucial service from their current advisors. When doing a complimentary, confidential, no-obligation review of friend and family portfolios, we regularly see things like bonds (which generate highly-taxable interest income) sitting in a taxable account - when there is no need for interest income from that account.

If you know someone who would appreciate one of these reviews, please just let us know.

DOES YOUR WEALTH PLAN INCLUDE HOME OWNERSHIP FOR FUTURE GENERATIONS?

At a June conference held by RBC Capital Markets, RBC analyst Geoffrey Kwan gave his opinion that “Fixing housing affordability, particularly in Toronto and Vancouver, is likely past the point of no return.” High interest rates and inflation are clearly major culprits.

Here in August, the picture looks no rosier. According to a survey of developers done by the Canadian Home Builders’ Association, in the GTA, “22% of builders were cancelling construction plans, while 67% said they were building fewer units.”

Some reasons: Inflation raises the cost of materials and labour; high interest rates make mortgages less affordable, lessening demand. On the other hand - and demonstrating the complexity of this issue - demand in the coming years could outstrip supply, partly due to the federal government’s plans to bring in 500,000 new immigrants per year, plus international students and temporary foreign workers, without any requirement to ensure affordable housing for them. This policy, the speakers noted, highlights the lack of a national, coordinated strategy to fix housing affordability.

To our multigenerational families

Since we work with many multigenerational families, here is the bottom line for our clients: future generations may need substantial support affording a home, and if you wish to start saving and investing for them - or guiding them in how to do so - it is important to get started early. It was only recently that I started having this conversation with myself: “How can my children stay a regular part of my life if they have to move hundreds of kilometres away to afford a home?”

And so I am thinking about some options you might want to consider as well: FHSAs, TFSAs, RRSPs and ITFs. Which instrument is best in your circumstances and theirs? It depends, and we will be very pleased to discuss various strategies with you. For the moment, I want to draw your attention to two of these tools in particular:

1.FHSA: First Home Savings Account

The FHSA is a new registered account which combines features of an RRSP and a TFSA to help Canadians save up to $40,000 on a tax-free basis towards the purchase of their first home. We have been setting up many of them for our clients, their children and grandchildren. See our more detailed discussion here, in the March edition of this blog.

2.ITF: In-Trust-For account (a way to get started really early!)

The ITF may be of particular interest if your children or grandchildren are under 18 - because minors are not permitted to own FHSAs or TFSAs. The ITF allows parents and grandparents to set aside funds for minor children, allowing the account holder to make binding investment decisions on the child’s/grandchild’s behalf, even potentially splitting income for tax purposes.

There is also the option of making a lump-sum payment to your children or grandchildren. If you were to follow this route, you would be far from alone: a Royal LePage survey in June found that “36% of first-time homebuyers in the GTA say they received a lump sum payment from parents or relatives to purchase a home.”

Want to talk through the options? As always, we are here for you and your families, whatever their age and stage.

CHINA IN CONTEXT

Speaking of property markets, a note on China. With the world’s second-largest economy and population (next to the United States and India, respectively), China has a significant impact on global growth. Earlier this year, there was optimism that their reopening after the pandemic would boost the global economy, but an initial rebound has faded. Their struggling property market is a key factor: approximately two-thirds of Chinese wealth and roughly a quarter of their country’s annual economic output is wrapped up in it, yet home sales are declining amid government policies intended to dampen inflated home prices and overly-leveraged developers.

But: it’s important to keep things in context. Forecasts place China’s growth just shy of 5% this year – a rate that would outpace many developed nations, including Canada and the US. And we believe that China will be a top contributor to global growth in the next decade.

SUMMERTIME REFLECTIONS

The warm summer weather, slower pace of life and time away from the hustle-and-bustle puts many of us in a reflective mood. Summer is a time of creating memories, and also of creating the future. While on balance, my phone rings less this time of year, there are always many clients who reach out to discuss big picture issues including estate planning, philanthropy and supporting the next generation. If you, or someone you care about, would like to reflect on any of these or other matters with me - keeping in mind we have an RBC team of unparalleled depth and breadth behind us - I look forward to hearing from you.

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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.

Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated

tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com

**To learn about our unrivalled team of experts, delivering Canada’s widest array of wealth management services to our clients, visit our website, here and here.

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