Archive for June, 2010

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Tax deduction and Insurance

June 24, 2010

You can claim a tax deduction on insurance premium payments in three cases:*
1: When the policy (non term) is used as collateral for a loan.
2: When the policy is donated (via beneficiary) to a registered charity.
3: When the policy is part of a registered plan.

*subject to specific terms

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Inflation and Real Return Bonds

June 24, 2010

Should you consider Real Return Bonds? For a quick description see:

http://www.bylo.org/rrbs.html

Inflation is currently approx 1.4%, which is low/normal. If it becomes something the Bank of Canada cannot maintain using its standard inflation control measures (to maintain an inflation rate between 1-2%), then Real Return Bonds, or RRB Funds should be something you consider for your portfolio.

At this point, I would say that paying additional premiums for inflation protection is a little unnecessary. Having said that, if you review my previous post where I wrote about the imminent need for BOC to engage monetary policy tactics to print extra money, you would agree that there are some concerns over its effects on rising inflation. How to we resolve this incongruity? Well, we can take two approaches based on making a decision on two assumptions: 1) How much faith do you have in BOC being able to reign-in inflation in the event of a greater quantity of money in the marketplace? If you remember, increasing the quantity of money devalues the currency and drives up inflation through price increases. 2) Can the premium paid for inflation protection be justified in light of better entry points for regular bonds/bond portfolios especially when the inflation threat has been removed? Why would you pay more to protect a threat that does not exist? It’s almost an arbitrage question. It is reasonable to assume that if you choose a RRB or RRB Fund and matched it to a regular Bond or Bond Fund of identical (assuming it exists) duration and interest payment (coupon) and the BOC is in fact succesful in maintaining low inflation, you would likely see a return greater than a return on a similar RRB’s/RRB Funds. The spread differential arising from the regular Bond/Bond Fund being purchased at a lower price, would produce a greater percent yield change (delta) in return over that of the RRB’s/RRB Funds as they converge in time to the same end value. Therefore, and subject to normal yield curve dynamics with a buy-and-hold strategy, in an area of mitigated inflation prevention, RRB’s/RRB Funds would not seem to be worth it.

To add balance I will say that I haven’t mentioned anything here about the strategies for buying and selling the bonds/portfolios for short-term gains on irregular yield curve shifts. I have also made assumptions regarding the reality of finding true arbitrage opportunities (the arena of hedge funds) between RRB’s and normal bonds. It may, in fact, not be possible to find identical features from across both bond types.  Also, I did not consider the responsibility of pension fund managers, segregated fund managers, or other guaranteed fund managers, who must consider the possibility of inflation as a protective and ethical measure for principal guarantees and who,therefore, may measurably affect the realized value of RRB’s/RRB Funds.

All of these points would likely bring different conclusions, which I would encourage. I am simply considering long-term buy and hold strategies– strategies more relevant to the average investor and, in my opinion, the only real strategy to consider when you’re using RRB’s or RRB funds in your portfolio. From that, I conclude by stating that I still do not recommend RRB’s at this time, but am cognizant that it can be a good solution for the conservative investor in a long-term buy and hold strategy. Lastly to consider, there is not a great deal of historical data to support the effectiveness of the Bank of Canada inflation control measures at this time. If such data eventually proves its effectiveness, I suspect that there will no longer be a need for inflation control measure (and their additional costs) in investment products.

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Fundamental Networking

June 24, 2010

A good article on asking the right questions to a networking prospect:

http://thenationalnetworker.blogspot.com/2010/06/network-like-pro-five-standout.html

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Education

June 22, 2010

I have decided that I have become critical of the concept of saving for your childs university education. Wait now…don’t get mad… There’s a point.  There are programs such as the RESP with a lifetime government top-up maximum of 7200 (depending on family income levels) and a maximum lifetime personal contribution limit of 42000. Sure it can grow tax deferred like an RRSP and it is taxed at the childs tax rate upon transfer (the contributions, however, are not tax-deductible), which is lower. There are some good strategies for maximizing those contributions. I especially liked the commentary on Tim Cestnick’s strategy by the FrugalInvestor (see http://www.milliondollarjourney.com/optimizing-resp-contributions.htm).

At this juncture I pose to you the following question: why are we, as investment and educational conscious parents, not demanding assistance with financial strategies for funding the pre-university education of our kids. I’m sure some of you have, but you appear to be in a minority in my experience.  I argue that the twelve years before university are more vital to a child’s development (educationally at least) than University. If the proper foundation is not set, what use is a 40k university education? How many of us had to work at call centres with large debt loads and various degrees because we are not competitive.  I’m sure the fault can be spread around, but I’d rather save for a more extensive preliminary education (even if only at the high school level). Flip it on its head- support them in their most influential years by presenting the highest quality education possible and then later, if they wish, figure out a way to assist them in getting themself through university. Perhaps they will even get a scholarship or financial aid. This seems to me to be a better strategy than the oft-used opposite.

Not that I’m against public schools or teachers. I certainly don’t have what it takes to be a teacher and there are certainly some premier public schools out there, but I don’t believe that the public school expose kids to the same kind of benefits as private schools. I am open to criticism on this point, but I spend a lot of time at Kings Edgehill and I can tell you that is shockingly different from my experience.  I was never exposed to a 10th of what those kids are.  It made me think that I would have rather paid 25-40k on that education than on the one I received in university.  Those kids are moulded instead of managed. The classroom size is allowed to stay reasonable. The  beaurocracy does not tie the teachers’ hands. The curriculum is allowed an unprecedented creativity without 10 years of committee.  The students are in music, theatre, sports, have jobs, all at a level that I have never seen in my experience; and for the same money that I (and mostly my parents) spent for University.

I am certain that this (in part) developed out of a false sense of practicality. It is natural to think that it is easier to save for 18 years than for 5, 10, or 12. If you’re not lucky enough to already be financially comfortable when you enter a relationship, it is easy to fall into the all-to-familiar trap (which I have spoken about critically in a previous post): saturate our family finances with credit card debt, car payments, a mortgage, a dog and then a baby. After that, and the removal of your sanity and time, all that is left is a life of paycheck to paycheck. If you are keen and have committed to saving for the baby’s education, why not simply adapt your investment strategy to a different concept.  Truly speaking, the timeline is not really that much of an issue. In the longest example,  you can take 14 years to save 30,000 dollars, which would pay for three years at a premier private school (high school level). That’s pretty good. Of course, using the shortest example of 5 years for elementary school predisposes perhaps a different economic entry point for the relationship, but even that is not impossible. You can fund the entire 12 years, 4000-5000 dollars at a time, with 12 years being about 50 thousand. I don’t know about you, but I know many people who spent 40k-50k on a four-year university education (+2 extra years in some cases) that didn’t give them  their dream job. And yes, you cannot claim a tax deduction on elementary and secondary school tuition payments, but there is financial assistance just as there is for the university level. And if you’ve had to borrow some of it, you are borrowing at a younger age with a better time horizon with which to recover. Without over extending the point, I guess the point is that if you decide to save for your children’s education..consider the increased advantages of earlier specialty schools. It doesn’t appear to come at the cost of time or money. In fact it can probably save you both.

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Income Splitting and Investing

June 21, 2010

Simple Tip: The higher-income (and hence higer tax-paying) family earner should pay all the bills (rent, mortgage, utilities, groceries, credit card bills, etc) as well as any income tax bills for the lower income earner. This frees up the lower earner’s “retained earnings” to maintain a larger investment base with which to invest at a lower taxable rate.
Moving down one tax bracket can translate into a +10%* differential in possible investment returns from a similar investment strategy over that of the same investments by the main earner (subject to identical investment strategies and return scenarios).
*Estimate based on combined marginal and provincial (NS) rates for 2010. see http://www.taxtips.ca/marginaltaxrates.htm

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Yachting and BP

June 21, 2010

What do you think of BP CEO Tony Hayward flying into England to see his yacht race around the Isle of Wight in the wake of the scrutiny over their handling of the spill? Well, from a business standpoint, suspending dividends and increasing liability caps to support Gulf Coast clean up efforts is quite a ‘revolutionary’ step when you consider a history of “shareholder” reaction to dividend suspension policies. As has been quoted by myself and others, those decisions were boldly positive for “stakeholders” of the business (that is to say everyone, shareholder or not, whose existence relies on the company)–those very millions of individuals whose existence drives the business from a holistic financial sensibility beneficial to the company well beyond that of direct shareholder equity. It is nearly unheard of in traditional corporate financial strategies and thought to be suicidal to company share values. In this context we can consider his decisions very bold and even socially responsible.

Having said that, it is certain that there is a demand to crucify the enemy of any environmental disasters. It is also human nature to search for a figure-head victim to fill that need.  What we often forget, though, is that after crucifixion the memory wanes.  If they truly want to change, channeling that frustration toward Hayward is short-sighted. Though I do support high levels of scrutiny for oil companies,  I recognize their essential need in the economic universe that we live.  There is a positve future that we are moving away from: responsible energy companies, like Xcel Energy (US),  Irving (open to scrutiny) in Canada, to a lesser extent Royal Dutch Shell, and even BP are in a transition. Old paradigms like conservative mentalities are always the last to run out of excuses to fill their theories.

I also ask: where were the hangmen during pre-spill economic thrift? Sure they were out there: they existed only amongst the most radical groups persecuted for  resorting to oft-militant  trudging.  Now the fiery and fervent ‘scruitinors’ appear precipitously in areas they couldn’t previously stomach.  They demand and yell for justice now when a year ago they would consider BP to mean “Boston Pizza.” Now Hayward’s every move personal life or other is the fault of all problems with the environment and global warming.  This ‘fad’ has become sociable, if fleeting, and surely ‘newsworthy’ on its own. The real issue is not discovered from the Perez Hilton of economic news coverage that easily lends itself to anger-fueled ratings, but rather from the larger issue that we would rather sweep under the rug.

The morality of the issue is not on Hayward. His own spokesman Robert Wine said the break is the “first for Hayward since the Deepwater Horizon rig that BP was leasing exploded April 20, killing 11 workers and setting off the undersea gusher. ‘He’s spending a few hours with his family at a weekend. I’m sure that everyone would understand that  (http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b3709919).”Somewhere we can all agree that he is entitled to a separation of life and work, but perhaps he could use a little tact (no pun intended).

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Website Design

June 18, 2010

Almost have it ready. Check out how pretty. Stay for some content