Monday, 21 November 2011

The 30 items you need before you die

Do you have a Death Book? 
It might sound a little morbid but everybody needs one. While you never know when it will happen, the "if" is pretty certain.

I deal with issues surrounding mortality on a daily basis so please excuse my candid nature. In fact, Bill Watterson found a great way to breath comedy into it with his comic strip "Calvin & Hobbes"



Why on earth would I want a Death Book?
Some people like to avoid talking about the inevitable - at times believing that if they just ignore it, it will solve itself. Unfortunately, those who leave it too long can create worlds of problems that they never intended to leave for their heirs. Here are a few reasons that illustrate that an ounce of prevention is worth a pound of cure:
  • The National Association of Unclaimed Property Administrators report that state treasurers in the US currently hold $32.9 billion in unclaimed bank accounts and other assets. (the Bank of Canada allows you to do a search for unclaimed balances)
  • Roughly 80% of term life insurance policies never pay out. Most result from people cancelling their policies before they die but at least ten states in the US have launched investigations into insurance companies accused of sitting on an unknown amount of unclaimed insurance policies. New York State alone holds more than $400 million in unclaimed life insurance related payments
  • Without a list of assets, the heirs will have to do their own investigative work to discover what was left behind - either waiting for clues to arrive by mail (tax bills, T slips, etc) or by hiring a private investigator

So what would go into your Death book?
Personal Information
  1. Your Personal Information - Full Name, Birthdate, Social Insurance Number, Address, Phone Numbers, Key Work Contact, Title and your Group Benefits Plan Number.
  2. Your Spouses Information - same as above.
Relative/Friend Contact Information
  1. Key Personal Contact - Who would you like notified first? This person would have the responsibility of administrating your affairs in your absence. They would notify family, take care of funeral arrangements and often act as your executor.
  2. Relative Contact Information - Which relatives would you like called first? Word will likely travel but your close relatives usually like to hear it from someone close to you rather than through the grapevine.
Advisor Contact Information
  1. Key Legal Professional - Should be the council who helped you to create your will. They can also keep a copy of your Death Book.
  2. Key Financial Professional - This person should keep a copy of your Death Book and in many cases has helped you to create it. They should be very acquainted with your finances, life insurance arrangements and assets and liabilities in general.
  3. Accountant/Tax Advisor
  4. Home and Auto Insurance Agent
  5. Bank Manager/Advisor

Other Key People
  1. Spiritual Leader
  2. Executor 
  3. Children's Guardian
  4. Alternate Guardian
  5. Doctor
  6. Dentist
Documents
  1. Your Current Will (including Enduring Power of Attorney and Personal Directive)
  2. Your Spouses Will
  3. 3 most recent Tax Returns
  4. Marriage Certificate (or Divorce records)
  5. Birth Certificates/Citizenship Papers
  6. Business Agreements
  7. Banking Access Information
  8. Record of Investment Holdings (incl: RRSP, LIRA, TFSA)
  9. Deeds and Real-Estate Documents
  10. Outstanding Loan Documents
  11. Funeral Arrangement Documents
  12. Life Insurance Policies
  13. All Other Insurance Policies
  14. Record of Credit Cards
  15. Record of Personal Valuables (jewelry, vehicles, etc)

Where should you keep your Death Book?
You can store the documents with your attorney or financial planner.  Also put a copy in a safe-deposit box or at home in a fireproof safe that someone else knows the combination to. You want it secure and accessible when it is needed.

If you don't know where to start, get in touch with us. We can give you some free simple templates that will get you started. Compiling your Death Book will also simplify things for your lawyer when drafting your will.

Friday, 18 November 2011

Top 3 Investing Secrets to Avoid Volatility

Apple pie. Apple pie? What does apple pie have to do with investing? A lot, actually.

You have probably had at least a few different apple pies in your life. Some good, some great, and if you are unlucky, some absolutely terrible. The ingredients are essentially the same - apples, flour, butter, sugar - but the outcome can be substantially different. Investing is oddly like an apple pie in that many people have a very similar criteria when selecting them, but small nuances in their selection process has drastic results on the outcome.

In this post, I will release some of my "secrets" in that really aren't so secret, in fact, they are actually quite obvious. Although quite ingenious, I can't take credit for them. I still remember when they were introduced to me. In their simplicity, I was left thinking "why didn't I think of that?".

Secret number One - Get Quality Security
This one is short and simple. Don't invest unless you have a margin of security. Take note in how the banks invest their money. They don't buy stocks or mutual funds with it, that would be ridiculous - they would only do that with someone else's money ;). Instead they lend it to companies with ongoing revenues, sound business plans and most importantly - assets that they can hold as security. They truly understand how the priority of claims work and it shows. As an investor, you should be doing the same.

Secret number Two - Invest where you can add value
If I invest, I want to share in someone's smart management AND add value. Buying stocks, funds or bonds in the traditional market, is just giving to some random person - not to the company who can use my capital to create something more. Buying units from another person (as opposed to buying them from the company itself) doesn't offer anything to the company. It's almost like getting something for nothing (which is one of my red flags). Instead, look for outstanding organizations where your capital can enrich the company you have chosen - it will amplify your investment return and create a win-win situation.

Secret number Three - Performance based investment management
Greed can push even the most honorable people to make decisions in their favour at the expense of others. Madoff, Jones and many others had a doorway open to them that they just could not resist. In another life, they may have been honest people - but for many, the temptation is too great. Performance based management introduces a structure where management is rewarded in the same manner as the investor. Usually the management will take a minimal fee to cover basic expenses and costs while the bulk of their pay comes at the end in the same form as the investor. If structured right, the management only gets paid if they do well. Take a look at your fund statements from the last year - was your manager winning while you were losing? If your answer is yes, then performance based fees may be for you.

In Conclusion
Over the last few years the markets have been compared to Mr Toad's Wild Ride. I have watched portfolio's that remained constant and steady, and these 3 secrets were the common ingredients.

If I gave you a hankering for apple pie, I apologize. To make it up to you, you can either make your own, go to Vi's for Pies, or give me a call and I'll buy you a piece as we talk about how this process can increase your returns and decrease risk and volatility.

Wednesday, 9 November 2011

Are You In The 99%?

With all the #OccupyWallStreet noise going on right now, we keep hearing about this 99% (or the 1%) - but what does that really mean? This infographic from Visua.ly is far more digestible than a sandwich-board worn buy a unkempt protester.

See what side of the line you sit on here:

http://visual.ly/are-you-99

Wednesday, 2 November 2011

The Markets Are Falling!!!

"The sky is falling, the sky is falling!!!" was the absurd warning we heard in the story of Chicken Little.

In the more recent animated adaptation, Chicken Little happened to be right. Only this time it was invading aliens and he happened to save the world. While age old maxim's continue to be true, they reminds us to look at old problems in new light.

If you have been following the markets over the last few years, you know what I am talking about. The advice used to be "wait 10 years, the market always wins" - and they were right. Until now.

So what has changed?
Why does the institution that is our financial marketplace no longer seem to function the way we thought? Well, I have a few theories but that is all they are, just theories. If anyone says they have the financial markets all figured out, they are lying. Or delirious. Or both. So here we go:

Theory 1: Too many emotional traders. 
In the "olden days", you used to pick up your briefcase sized cellular phone (hello 1989) and yell "SELL BABY, SELL!!!". Generally, if it was a bad move, your broker might try to talk some sense into you before making the trade.

These modern times are quite a bit different. The advent of trading technology has taken this ability to the streets. Quite literally. I can walk down the street, turn on my cell phone and make a trade between stopping for coffee (or hot chocolate) and catching the next bus. From what I understand, the majority of trades (trade volume, not capital volume) will soon be made by the technically "uneducated" investor. That means that trading is not their day job, nor do they have any formal experience or education. This results in far more emotional trades than trades that use sense and reason. The end result - good companies and bad companies fluctuate in price for reasons completely unrelated to their actual performance.

Theory 2: Too many electronic traders. 
Just like the big trading brokerages, I can set my trading account to sell when a price drops or to buy when a price jumps (actually its just automated emotion - see theory 1). A prime example of this was in the spring of 2010 when the NASDAQ and NYSE among others had to cancel trades after an electronic landslide occurred. I imagine that it went sort of like this:




Theory 3: Baby Boomers Want out. 
Whether running from volatility to calmer waters or just pulling their capital to buy that built-for-a-rockstar sized Class A Motorhome, baby boomers hold a large (and when I say large, I mean LARGE) portion of the world's wealth. If they exited from the markets in ANY organized fashion, it could have astronomical effects on market prices. Right now, the workforce still needs them, but mark my words - one day they will want out. Working at 65 keeps the mind sharp but in 5 or 10 years, they are going to pull themselves from the workforce and start drawing on their wealth. My guess is that it will look like a 13 year old kid cannon-balling into the middle of a seniors aqua-sizing class.

In Conclusion
So what do we make of this? Some say life is hunky dory and its time to buy while others say the world is coming to its end. Whether that cannon-balling kid is the Sub-Prime Mortgage Debacle or the Greek Credit Crisis, I am not convinced that fixing them will stop the waves of volatility. Ultimately, I feel our current model is broken. Our world has changed significantly and the markets haven't. Instead, they have become more nebulous and complicated - adding options, derivatives, and other "attachments" to an antiquated model. There comes a time when you stop waiting for the stagecoach and catch a bus. Or a plane. Or a spaceship.  In the end, you need to ask yourself one question: Can the markets can efficiently serve your needs when they have become detached from the actual performance of the underlying company.

Simplicity is making a comeback. Baby Boomers have demanded something different and a new market has emerged. Fully secured investment, performance based fees, thin investment management and tangible companies that give you face time with the CEO (if you really want it). In the immortal words of Bob Dylan, times they are a changin'.

Saturday, 22 October 2011

World Collapse Explained in 3 Minutes

Sadly, this 3 minute video is very funny AND very true! The figures are mostly correct and it uses satire to make the data digestible. All about the EU but much of the rest of the world is in the same boat.

Sunday, 25 September 2011

The Commission Grid: The Conclusion on Commissions and Conflicts

Commissions and conflicts of interest have always been a hot topic in the financial services industry. Management fees can make or break portfolio returns depending on their size and frequency. How do yours stack up?

Preet Banerjee, the man behind GetSmarterAboutMoney.ca and WhereDoesAllMyMoneyGo.com concludes his series on the topic.

He makes a key point: how an advisor is paid is far less important than their willingness to discuss it with you. You can read his conclusion, as well as the entire series here on his blog:

The Commission Grid: The Conclusion on Commissions and Conflicts

Wednesday, 21 September 2011

Prosperity Engine's New Dealer - Pennant Capital Partners

Have you ever paused for a moment, only to wonder where the last hour, day or week has gone? If so, then you understand how we feel about 2010 and 2011. After some major regulatory changes (click here to read the boring details) we had some pretty big decisions to make.

In a nutshell, the Alberta Securities Commission (ASC) now requires Exempt Market Dealers and Advisors to be registered and follow a strict compliance process (as of Sept 28, 2010). Thankfully, this wasn't anything new for Prosperity Engine as we have had a compliance structure and requirements for suitability assessments in regards to a clients investment needs. The real curve ball came when our previous dealer decided not to continue as a dealer anymore, instead focusing on a successful investment product they had created years before.

Having been spoiled in the past with a team of Chartered Financial Analysts to vet opportunities, our standard was set terribly high. Meeting after meeting was held with new dealerships discussing their processes, the depth of their investigations and their past performance and experience. After months of scrutiny, there was one that rose to the top. They stood above the others for 3 reasons:
  1. Good, caring, moral people with a conscience 
  2. Performance based - They get paid when the investor gets paid. 
  3. Industry leading track record and creativity 


Good Caring Moral People with a Conscience
I am particular about the people I spend time with. I want to surround myself with good, like minded people who share the same standards and level of integrity. The people involved in Pennant Capital Partners are caring people that love their families and understand their responsibility as a fiduciary to each of my clients.


Performance Based
The number one complaint I hear about other advisors and managers is their fee structure. Clients don't feel it is right to watch managers take record pay-cheques and bonuses while there portfolio's have had record losses. My conscience leads me to aim for performance based management fees. Pennant agrees that an investment management team should be rewarded in the same manner as the investor so that the management isn't tempted to act separately for their own best interest. Performance based management ensures that the incentive for management decisions will benefit both equally. While this isn't always available, Pennant strives to arrange performance based alignments in compensation between management and the investor.


Industry Leading
I strive to improve, so I surround myself with people who I can learn from. Pennant has an insutry leading team of CFA's and PM's and MBA's that combine for a powerful vetting team. They not only have the expertise to look at financials but also at the business case as a whole. They want to see a viable business that can produce what it promises and can secure the investors properly.

Some of their past experience and credentials include:
  • VP, Ernst & Young Orenda Corporate Finance Inc. 
  • B. Comm (Finance with Distinction), Haskayne School of Business 
  • Chartered Financial Analyst Charterholders 
  • MBA (Finance), Haskayne School of Business 
  • HBSc (Actuarial Science and Statistics), University of Western Ontario 
  • NASD Series 7/63 
  • Canadian Investment Manager Designation 

CRA begins to tighten up on TFSA rule-breakers

I always cringe when CRA brings the hammer down.  With an often uncoordinated swing, auditors squash innocent people while attempting to stop the over-creative types from abusing a good thing.  Now don't get me wrong, I use all kinds of tax planning to minimize my clients tax burden - I just make sure to stay far enough away that we don't get mashed by the gavel.

To say that TFSA's still have some growing to do is an understatement.  First available in 2009, only minor changes have been made to TFSA legislation. CRA has recently started their fish-in-a-barrel shooting spree as much of the misunderstood/ambiguous rules have been broken. According to the Toronto Star, 103,000 Canadians were sent a letter in 2010 outlining penalties that had been imposed because of their TFSA over-contribution. After heavy criticism that the rules were confusing and unclear, CRA refunded the penalties. Although it was a nice gesture to extend that grace, CRA's mercy has a short shelf life.

On the other side of the coin, the over-creative types are taking advantage of the poor clarity to leverage up their tax-free investment growth. While many strategies abound, one common tactic is to rotate investments through a TFSA just before they mature. Once matured, a person can remove that investment and replace it with another that is set to mature soon after.

Turning over multiple investments in a year poses two problems for the CRA:
  1. Lost tax revenue on the investment growth. The TFSA is meant to hold an investment from inception to fruition - shuffling investments through your TFSA could soon be considered tax evasion.
  2. Investment growth inside your TFSA creates more new room. Rotating investments through a TFSA unfairly expands usable TFSA room.

Turning over multiple investments in a year poses two problems for you:
  1. When CRA discovers a strategy that crosses a line, they not only ask for the tax back, but charge you interest.
  2. When CRA starts looking at your file, you never know what else they will find.

In the Toronto Star article, Roseman warns of CRA's coming judgement that will likely bite those opportunists in their pocketbooks.
"You can also get into trouble if you withdraw money and replace it in the same calendar year, even if the account value never goes over $5,000."
There is a fine line between being prudent and pushing past the limits. If you see something that looks opportunistic, ask to see an opinion letter issued by an accountant - or get the opinion of your accountant. They have strict guidelines to protect you as a client. Their job is to tell you what the rules and risks are - then you can make an informed decision.

To find out more about TFSA strategies that you can use, contact us.

Tuesday, 20 September 2011

Rate Increases on your Health and Dental plans


You get one almost every year - a rate hike on your health and dental plan.  Companies will quote low to get your business and then raise the premium year after year.

Did you know that the company offering your health and dental plan charges anywhere from 30-50% more than what you actually spend on your claims?  It is something called a stop-loss ratio and it is built in for the "what if's" that they may have to pay out.

Right now in Alberta over 20,000 businesses and 50,000 families are using an alternative that only charges a fixed 10% and give you far more flexibility on what you can purchase.  Imagine, 100% coverage on your prescription drugs, your teenagers braces covered at 100%, or making additional trips to the chiropractor, naturopath or massage therapist - the choice is yours (see this list of allowable items).

Plans can take on whatever form is most important to you or your employees and are easily scaled from a single business owner to hundreds of employees.  There are also nifty add on's like Exceptional Expense Insurance, Travel Insurance and Snowbird Insurance.

Call us to learn more.

Introduction To The New Exempt Market


Like a mean lover, the stock markets toy with us. Up one day, and down the next - the changes often are clear in hindsight but little is clear in foresight. Are you a part of the growing movement who have found a solution to largely remove this volatility while retaining strong, healthy growth?

The Birth of the Exempt Market

In the 70's, baby boomers were just entering the accumulation phase. Well aware of their parents struggle with the ups and downs of the traditional market (stocks), they demanded something different - less volatility and more stable returns. For its time, the answer was groundbreaking: pooling stocks within a Mutual Fund. This pooling meant that risks were mitigated and volatility was reduced.

In recent years, funds have taken on a different personality than their predecessors (there are more funds available than stocks to put in those funds). As they became mainstream, the insulation from volatility began to disappear once again following major market trends. There has been attempts to remove this volatility with ETF's, hedge funds and various other instruments, but none have fully answered the investors call for stable, secure, simple channels of investing. All of these instruments have become a part of the traditional market.

Baby boomers are now at another turning point in their lives, demanding simplicity, security, and stable investment returns as they approach retirement. This demand to remove volatility and ensure security has led to the significant growth of the Exempt Market. As a result of this growth, the Alberta Securities Commission (ASC) introduced legislation to regulate it in September 2010. This is the first time institutional investments have been available to the retail investor in a fully regulated environment. 

What is it "Exempt" from?

In the past, private equity firms could raise capital outside of a prospectus. After meeting certain requirements, they could raise capital without filing a prospectus under specific restrictions and were in turn referred to as an Exempt Market investment. 

In more recent years, the ASC has required a document that parallels the Prospectus.  This document is called an Offering Memorandum (OM) and can typically be more detailed. The OM must be filed with the ASC prior to raising investment funds and the firm cannot deviate from its contents.


How does it compare to traditional markets?

Traditional markets (bonds, stocks and funds) typically have multiple layers. Money is pooled into investment banks which often invest in lenders that deliver the funds to the end borrower. The graphic below is a simplification of this system. Cumbersome and nontransparent, information is often limited to the short prospectus and what can be found on the internet. This nebulous model is what allowed the creation and sale of the sub-prime mortgage bundles that took down some of the most well educated and well funded investment banks in 2008. 




Recently investors are migrating to simpler and more direct investment channels looking for lower overhead, smaller investment management and in turn, less layering of fees to impede investment growth. The exempt market provides the opportunity to remove much of the overhead. 

While this model has many advantages, it also places all the responsibility on the investor and the Exempt Market Dealer (EMD) to perform due-diligence on individual firms. Ensuring your EMD has internal, highly trained analysts with in-depth experience and proven history is a key step to investing safely. It is common for EMD's to farm out their analysis leaving the bulk of the responsibility to someone who has no fiduciary responsibility to you as an investor.




In our search for a dealer, we insist they have a dynamic team of internal analysts that carry the Portfolio Manager (PM), Chartered Financial Analyst (CFA) and MBA designations. Most importantly, we require they have a fiduciary obligation to the investor and value that obligation. Our search ended with Pennant Capital Partners Inc2. They use great care and prudence to select investment firms to work with. They also perform regular audits to ensure ongoing compliance and success. Their expertise surpasses that of the educated investor and financial advisor. 



Your advisor and EMD become your partner in managing your portfolio. Pennant works to perpetuate performance based management fees. Their goal is to ensure that the investor is vested equally with people managing the investment. This results in a relationship where your best interest is parallel to the best interest of the people managing the investment. When they win, you win and if you lose, they lose.

New Regulations and Legislation

The exempt market has grown significantly over the last five years. In 2008 alone the exempt market in Alberta raised $10 billion2. In recognition of that growth, the ASC introduced regulations and licensing requirements on Sept 28, 2010 to bring professionalization to the exempt market sector. 

Previous to this date, the exempt market was open for anyone to sell securities. There was no requirement to gauge suitability for a potential investor and therefore no repercussions if someone sold an investment to a person who it did not suit. The new license carries with it a fiduciary duty to look out for the investor's best interest, ensure that investments are suitable for the client and that they appropriate for their risk profile. 

Prosperity Engine Inc. exists to assist investors with the prudent selection of investments that suit their respective risk profiles - ensuring security and safety while maximizing investment return. 


Disclosure: Prosperity Engine Inc. is a Registered Dealing Representative of Pennant Capital Partners Inc. and advises clients in the purchase of investments offered through Pennant
2 http://www.cbc.ca/news/business/story/2010/02/08/f-exempt-market-investors.html

Eat Or Get Eaten - Where do you stand in the investment food chain? (Priority of Claims)


Lets assess your portfolio.  What percentage is invested in stocks? What percentage is invested in funds? If your answer to those 2 questions equals higher than 50% then you are nearing the bottom of today's investment food chain. 

Banks have a specific style of lending. When you ask them to invest your money, they put it into the markets. When they invest their money, they insist on security and rigid fixed terms. That security puts them near the top of the food chain as they seldom lose money.


How does the Priority of Claims process affect me?  

Priority of Claims is how Canadian law determines who gets paid first. Imagine a stream that is flowing past a number of villages. As the villagers draw from the stream, the amount of water diminishes. Investing too much in stocks and funds puts you at the end of the stream. If something goes wrong, maybe there will be enough water - or maybe it will be dry.

In Canada, the priority of claims looks like this (note - banks would fall into the "bondholder" class being a secured creditor):



Now lets get into the real world - we will use Nortel as an example. First, taxes were due and paid - CRA always takes priority. Second, the employees (actually, mostly executives) received more than $140MM in bonuses above their regular paycheques. Next, the bondholders (who were secured against assets) walked away with all their capital plus about 10.25%1 interest. Now right here is where the stream ran dry - their stock holders were left with less than a penny2 for every dollar that had been invested. The bottom of the food chain gets fed last - if at all.  


Debt to Equity: How much water is reserved upstream?

(Accounting nerds, you can skip this section) 

Debt to Equity (DTE) (Similar to Loan to Value or LTV) is a financial ratio that indicates the value of assets compared to liabilities (or debts). It indicates how much water should come down the stream if a business was to become insolvent (bankrupt).

There are many ways to translate this ratio. If there are more assets than debts the DTE is a fraction of 1. For example, if you home was worth $500,000 and your outstanding mortgage was $250,000, your DTE would be 0.5. Alternately, if the housing market dropped significantly and your home was only worth $100,000 (outstanding mortgage still at $250,000) your DTE would be 2.5.


What does DTE do to protect you, the investor?

If you are a bondholder or secured creditor, you have security against the assets. It is important that the total debt is less than the value of the assets and it is very beneficial to have a good sized buffer in place too.

Lets look at the Canadian bank mortgage model to gain a better understanding of DTE and this buffer. Your bank will generally lend you up to 80% of the equity in your home. Below 80%, or a DTE of .8, they have sufficient security. In case of default they can foreclose, sell the home and have a buffer of 20% or more for safety. This will cover their fees, interest owed to them, payments that may be in default, legal costs and Realtor fees when selling the home. When everything is settled, the chances that the bank will cover all their costs and have some money left over.

Back to your investment - you want to be secured like the banks do. Understanding DTE is a key part of safe investing. There are many types of assets ranging from real-estate to contract cash flow - investigating the quality of the asset becomes key. 

Exempt Market vs. Traditional Markets

So how do the markets differ from each other? 
  1. Traditional Markets - Bonds generally trade good security for lower returns and vice versa then issue shares and stock for remaining opportunity for excess return with no security. Often shareholders/stockholders are lower priority than the principals of the firm.
  2. Exempt Market - Good, reputable firms can issue bonds and/or shares to investors so that they have both security against the assets through the bonds and potential for growth through the shares. In all cases, we ensure that the debt to equity is well in the favour of the investor. (Note: Not all exempt market investment firms operate in this manner or ensure that proper security exists. Ensure your advisor or exempt market dealer are qualified to properly inspect the security and structure so that you remain protected.)


Conservative Leverage


The concept of leveraging is much like a power tool one would use to build a house. Capable of both greatly enhancing a person's ability to build as well as damaging or harming you and what you worked so hard to build.

The benefits involved with using power tools far outweighs the risks, as long as the risks are properly managed. For example, you wouldn't operate a table-saw without safety glasses, or put your hands anywhere near the circular blade. With proper care and attention, power tools can drastically increase your productivity - whether you are building a birdhouse or your dream home!

Leveraging involves risk and return that are similar to power tools. It can magnify losses as effectively as it can magnify gains - and much like a power tool, you need to make sure that all your safety gear is in place BEFORE you start your leveraging.

There are many different ways to leverage. 1)Leveraging from your personal cash flow and 2)Leveraging from investment cash flow. Each type of leverage requires careful assessment to ensure that you don't expose yourself to more risk than you can financiallyand emotionally handle. 

Leveraging From Personal Cash Flow

This type of leverage involves simply borrowing to invest and then paying down the principle of the loan with interest or just paying the interest. Essentially, you borrow the amount you can afford to service and invest that lump sum of money. Then, rather than making regular investment deposits (say $100 a month for a fixed term), you borrow enough principle to create interest payments equal to your investment of $100 a month.

Each time the principle of leverage is discussed, the topic of risk must be reviewed. This article from Talbot Stevens, a renown Canadian authority on leveraging conservatively weighs in on the risks involved when using the principle of leveraging in your financial plan. Click here to view this brief overview.

Leveraging has significant growth benefits over RRSP's. Calculations demonstrate that over 20 years, a leveraged investment of $2,000 a year can more than double the same simple un-leveraged RRSP contributions yielding a benefit worth $165,000. Read more here.

Here are some key points to keep in mind as you asses your use of leveraging:

  • Be conservative (with cash flow, equity, and emotions)
  • Eliminate the risk of a cash/margin call
  • Invest for the long term
  • Prefer fixed/conservative investments to mitigate market risk
  • Diversify your investment (funds, bonds, land, etc.)
  • Most of all, Use a trusted advisor to help you understand the benefits and risks, to show you the best tools and to help you implement and stick to your plan

Leveraging From Investment Cash Flow

Leveraging from investment cash flow involves borrowing to invest and paying the interest expense from a portion of the cash flow that the investment yields. Generally, the interest rate earned on the investment would be higher than the interest rate charged by the lender thus creating positive cash flow.

Sound scary? This strategy is more common that you may have thought. Take a look at this example that brings it into perspective - purchasing a rental property with a mortgage (also called leveraging). You would pay the mortgage and all other expenses for the property with the rent that was collected from the tenants. The ultimate goal would be to create positive cash flow - rental income would be higher than the expenses including the mortgage payment.

This is how most businesses work from day to day. In fact, this is so common, that the Federal Government has declared the interest paid on leveraged loans create a tax deduction. This is the Governments incentive for you and I to borrow money to create more jobs and to grow the economy.

It is important to note that leveraging from investment cash flow changes the landscape of this principle. When borrowing based on your personal cash flow, you assess what portion of your monthly income you will set aside to service that strategy. When you use investment cashflow to service your leverage, part of the risk is increased while other parts are decreased.

First, lets talk about the risks that increase. When you leverage from cash flow, an assessment is done to determine how much you can afford to pay each month. You are prepared to spend that amount on your investment - the most you will ever pay is what you determined you can afford (provided your interest rate remains the relatively same). When planning to pay interest costs with income from an investment, there can be a tendency to take on much larger interest cost. This can do wonders for your portfolio, provided the investment continues to produce the income that is expected. Investments like some bonds, income funds and dividend producing funds are some of the tools that can be used to accomplish this end. To mitigate this risk, make sure you can afford to carry your leverage out of personal cash flow should your investment income cease. 

Now, a risk that decreases - this is your emotional risk. When your investment is set up to pay your interest charges as they are incurred, you don't have to worry each month about how you will cover that payment. This can make executing this principle easy and maintenance free when set up properly thus reducing the "perception" of risk. 

No matter what method you choose when weighing your options, be sure to call us to get a full understanding of the risks and rewards associated with leveraging. From directing you to lenders that won't make margin calls to finding stable asset backed investments that yield steady returns, we are here to help you.

Are you really covered? - Life Insurance through the Banks


The link below leads to a video that aired on CBC Marketplace. It is a very interesting message that may provide a reality check for all of us about banks and life insurance.

The banks in Canada have working relationships with insurance companies and sell tons of life insurance to cover mortgages and loans.

Unfortunately, it causes grief for most people that bought their protection from unqualified people and from organizations that do the underwriting after the claim.

This video is about 23 minutes long and is very revealing. Share it with anyone you wish. It is an important and valuable message.


CBC Marketplace - In Denial



I know some you have taken action with me to put the right guaranteed coverage in place and usually for a better price. If any of you have questions on weather or not you are protected contact me right away.

Compound Interest


Before we get to compound interest, lets briefly discuss simple interest.

Principle bears interest at the end of each period. The period for most investments is one year. For our discussions today, we will only discuss interest being paid once per period or once per year. Interest is a fee that is paid on borrowed capital. Whether borrowing from a bank, credit card company or an investor, borrowing incurs a cost. Interest is much like rent.

Simple Interest


$10,000 is borrowed at 10% interest for 5 years. This is how simple interest would be calculated.

At the end of each year, interest of $1,000 ($10,000 * 10% = $1,000) is paid to the lender. At the end of 5 years the borrower would have paid $5,000 ($1,000 * 5 = $5,000) in interest and also returned the principle of $10,000. The lender lent the principle of $10,000 and was returned the principle and interest of $15,000.

Compound Interest


There is one main difference with compound interest and that is that the earned interest is reinvested each time it is paid. For example, at the end of year 1 $10,000 earns $1,000 in interest. The principle now rises to $11,000. At the end of the second year, the interest is calculated on the new value of $11,000. This makes for interest of $1,100 for year 2. The following 3 year each compound as well. Take a look at the schedule below to see what happens during the remaining 3 years.

As you can see, a principle of $10,000 would have gained $5,000 with simple interest and $6,105 with compound Interest.

Comparing Simple and Compound Interest


When evaluating an investment, be sure to know which type of interest is being advertised.  Simple interest returns less than compound interest.

To illustrate this we will use a simple rate of 20% and compare it to the EQUAL compound rate of 14.87%. Both rates return $20,000 after 5 years. 

Once again, the reinvested growth raises your investment principle each year thus creating greater returns.  Investments returns that span a number of years can be shown either way.  Knowing which one you are seeing is essential for an apples to apples comparison.

For simple and complex information on compounding formulae, visit Wikipedia.org.

The Time Power of Money


This lesson demonstrates how time affects the growth of your money. In other words, the sooner you start, the richer you will become. A dollar today is worth far more than a dollar in 40 years - as long as you don't spend the $1,000 before then!

Ok, brace yourself...here goes. Lets say you turned 18 today and placed $1,000 in the bank this afternoon. This becomes your habit each birthday until you turned 25. You have now saved $8,000.


As you can see above, your $8,000 has compounded into $12,579 at a rate of 10%.  Read this if you would like an explanation on compound interest.
Now lets say your twin sibling saw your $8,000 investment turn into $12,579 and decided to take over your habit on their 26th birthday saving $1,000 each year for 40 years until they turn 65. They have now invested $40,000 while your $12,579 kept growing at the same 10% rate. 

Now, before you scroll to the bottom of the next schedule, who do you think has more money at age 65?


As shown in the spreadsheet, you would have $569,338 while your twin sibling would only have $486,852. What you see happening here is the time power of money. $8,000 over 47 years has a slightly higher value than $40,000 had over 40 years. That means each dollar of yours was really worth $71, while each dollar of your siblings was worth only $12. 

This principle shows the urgency in starting your savings today. Every year you wait, each dollar you earn has less and less value the day you retire.

Why borrow for your RRSP?

Originally published on xyeg.com on January 14, 2008

Looking to add to your RSP's? Consider this: Invest $10,000 cash to an RSP and the government could give you $3,000+ in the form of a tax deduction depending on your tax rate. That deduction filters right to the bottom line of your tax return. Not bad considering you’ll still have your $10,000 RSP.

Don't have $10,000 cash sitting around? Consider an RSP loan. First, borrow $10,000 to dump into your RSP. Then take the $3000+ tax deduction you just created and pay off nearly a third of the loan. With less than $7000 to pay back, your monthly payment at 6% would be $600/month for one year or $310/month for two years.

Keep in mind that we aren’t gambling away borrowed money here. We’re investing what we plan on paying back in the short term. The interest is a small price (a total of $230 for a 1 year term and $450 for a 2 year term) to pay considering the government just gave you $3000+ back. After a year or two, you’ve paid the loan and you have your RSP valued at $10,000 plus growth.

With the market depressed, logic says it’s a good time to buy. Alternately, consider investing in land or debt for double digit returns that don’t bow to market fluctuations.

For more info on RSP loans or details on the math discussed, please contact us.

Loan Details
This illustration is hypothetical and is based on the following information: An assumed tax rate of 30% will generate an additional tax return value of $3,000; The additional return is used to pay down a portion of the principle; The final loan principle will be $7,000 borrowed at 6% interest; Growth of $10,000 at 10% would yield $11,000 after 1 year and $12,100 after 2 years.

Actual numbers will vary.
1Year Term - The amortized loan would be paid out in 12monthly payments of $602.47 (principle of $7000 andinterest of $229.58). The net effect would yield a positive gain of $4870.42 if the RSP was invested at 10% per year for 2 years.

2 Year Term - The amortized loan would be paid out in 24 monthly payments of $310.24 (principle of $7000 andinterest of $445.86). The net effect would yield a positive gain of $4654.14 if the RSP was invested at 10% per year for 2 years.

For more information on land based investments and their potential double digit returns, please contact us.

Specific tax advice should be obtained by a qualified tax professional.

The New TFSA vs. RRSP vs. Doing Nothing


So what is the noise about this new Tax Free Savings Account? How does it compare to an RRSP? An RRSP will work best when you plan for your tax rate at withdrawal to be less than your current tax rate. The TFSA seems to work opposite to an RRSP. If your current tax rate is lower than your retirement tax rate then the TFSA is were you want to start.
Lets go over some basics for those who may not understand the difference between these two methods of saving:
  1. Money placed in your RRSP is not seen as taxable income by the government. Your pre-tax dollars then grow tax free until you withdraw them. What you withdraw and only what you withdraw is then treated as taxable income.
  2. Money saved in your TFSA is taxed in the year you earn it. The big benefit is that the money in your TFSA grows free of tax. When you decide to withdraw the money, the principle and the interest are free from being taxed so you don't pay the government a penny!

Take a look below to see how they compare*:


Who can benefit from this new account?
  • Anyone who has used all their RRSP contribution room.
  • Young people people over the age of 18 who have time on their side to let their money compound.
  • People with a small amount of taxable income and don't benefit from the tax deductions of RRSP's. (Some business owners, low income people, etc)
  • Seniors who can no longer contribute to their RRSP's

So what are the details that matter to you when you try to use this account? 
  • Anyone 18 and older can use it
  • You can contribute up to a maximum of $5,000 per year (future amounts are planned to grow with inflation and be rounded to the nearest $500). 
  • Carry your unused contribution room forward indefinitely.
  • Amounts withdrawn from your TFSA are added back to your contribution room unlike RRSP's.
  • Contributions that exceed your limits will be charged a penalty tax of 1% per month.
  • You can invest your money in pretty much the same investments permitted by RRSP's although the firm you invest in must be arms length from you (generally to exclude personal shares in a family business, etc).
  • Contributions are NOT tax deductible however income earned and withdrawals are both tax-free.
  • Amounts withdrawn from this account and all income earned will not affect other tax credits or benefits that use an income test for qualification (such as the Child Tax Benefit, GST Credit, the age credit, OAS benefits, Guaranteed Income Supplement, Employment Insurance benefits, etc.)
  • Money borrowed to invest in the TFSA will not generate tax deductible interest.
  • TFSA can be used as collateral for a loan, unlike your RRSP.
  • Tax-free status ends at the death of the account holder unless the spouse/common-law partner is the beneficiary. (Recieving the TFSA from a spouse does not affect their individual contribution room)
This is an account that almost every Canadian can take advantage of. For more details on how this can fit into your situation, contact us.

*Assumptions made for RRSP, TFSA and Non-registered savings as follows: $3,500 is saved in all cases; $1,500 tax deduction is included in the savings and growth of the RRSP; 30% tax rate at time of savings and at time of withdrawal; Investment growth of 10%; Non-registered growth taxed annually at 30%.

Data obtained here has been obtained from the 2010 Canadian Federal Budget and is subject to change without notice. Tax advice should be obtained from a qualified tax advisor.

The Unseen Cost of Credit Cards


Think you have your credit card under control? If you pay your balances off each month or use your card outside of the country to save on exchange rates then you should check these articles out.

CBC Marketplace has recently done a few segments on credit cards companies that everyone should watch. From extra fees on foreign exchange rates to paying your balance on the due date, you might not be getting the deal you think you are.

CBC Marketplace "Card Tricks" will get you up to speed on the fine print in your Cardholder's Agreement - Partial Payment, Currency Conversion Fees, Interest Rate Increases and Payment Due Dates are a few of the topics this article will open your eyes to. All are charges that credit card companies try to keep hidden.

CBC News "Negotiating a Lower Credit Card Rate" - Want to pay the credit card companies less money? They say it never hurts to ask...some found that it helps.

CBC Money Talks - Advice for those drowning in credit card debt explains the trouble of credit card debt and what to do if it is getting you down.

Personal Corporations (or Canadian Controlled Private Corporations - CCPC's) are pretty handy when they properly apply and can deliver a substantial tax savings. I have personally used these with the advice of my accountant and lawyer for many years now.

Before you start one, you need to make sure that they apply to your situation. The articles here can shed some light and answer some questions you may have about how they work and what they could do for you.

BDO Dunwoody - Independent Contractors and Personal Services Businesses - This article explains some of the tax benefits and woes of becoming an Independent Contractor.

BDO Dunwoody - Watch for the Personal Services Business Rules! - These rules placed by CRA are important to consider. They could deem your tax saving structure as non-existent unless you are sure you qualify. Don't be discouraged if you find that you don't qualify, reading this will show you another option.

For cost-effective assistance in organizing your company, we have an arrangement with a third party to complete the incorporation process as well as provide ongoing education, accounting and legal advice.

The information here should not be construed as tax advice. Tax advice should be obtained from a qualified tax professional prior to acting on any of the information discussed here.

Putting Your House To Work


You work hard your whole life to build equity in your home. Chance are, it will be the single largest purchase you will ever make. Most invest 20-30 years paying for it and the interest paid during that time can cost as much as you paid for your house. Sometimes even more.

So why not turn the tables? Many will continue through the drudgery of being subject to their mortgage for much longer than they should. It is quite fitting when you consider that the term "mortgage" comes from an old French legal term meaning "dead pledge". Simple action today could break those chains.

The process is simple and sound when it is implemented properly and with the right tools and advice. Much like a power saw, leveraging has the ability to substantially speed up your progress and can be quite dangerous in the wrong hands. Proper training, care and attention make these tools an excellent way to leverage your efforts.

That is where I can help. With access to the proper tools, like secure bonds with fixed double digit returns and loans that are free of margin-calls, I have the expertise to help you get safely on the right path, the first time.

We can start by sitting down to discuss what options suit you best. Once I have explained the details to you, I will insist you take it home and sleep on it for a few days. When you are ready, you call me. If you feel it is right for your future, then we will proceed.

Investing in Land


“Buy land, they're not making it anymore” - Mark Twain

There are many ways to buy land. Whether it be a rental property, vacant land or an office tower downtown, the rich have been getting richer by buying the stuff for years! 

Land Banking is the process of buying and holding land for future sale or development. Parcels for “Land Banking” are those that lie directly in the growth path of rapidly developing cities.

The initial goal is to buy undeveloped land that will increase in value because it lies in the path of urban growth. The key is to identify these parcels well in advance of the development and wait for their values to mature. With diligent research, financing and managing of a land-banked property, one can realize a handsome profit upon the sale.

Keep in mind that there are many different renditions of this practice. Land Banking involves planning, buying, holding, rezoning and selling. They never plan to touch the dirt. Some companies perform the same steps of land banking and also venture into development. The development stage generally bring higher returns.

Companies turn projects quite often. In recent years as the success of this investment market has become more well known, these projects tend to sell out in months, weeks and even days. Open houses are commonly held to showcase new projects as well as describe the methods used by individual companies. Contact me for meeting times or information regarding current projects.

Investing Your Severance Package


Severance packages introduce an excellent opportunity.  Seldom do we have opportunities to substantially add to our portfolio.  Monthly installments can accumulate over time but large lump sum contributions to your retirement savings will play a large part in attaining your goals.  Severance packages can also be structured to reduce your debt without just dumping it on your mortgage or loan.

So what should you do?  There are many people who are willing to give you advice on where to invest. Whether it is a sibling, friend, parent or someone on the internet, who's advice you accept and follow can have a significant impact on its real value.

The key is to make sure you properly diversify your investments.  Our strategy helps our clients to gain an understanding of what works for them.  We can help you to find your comfort zone while earning a healthy return.  The links below summarize our theory in balancing your portfolio.

Wealth Management Strategies
We urge you to call and schedule a consultation. It won't cost you anything but your time.

Once you are comfortable with a strategy, we as independent brokers can search out all the options to find the investments that suit you best.