Investing Fundamentals: Asset Allocation and Tax … · 2 . Agenda: Part II . Types of Investment Accounts Asset Location Tax Tips . You are probably wondering… = Chadwick D. Walker,
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Professional Development Course
Investing Fundamentals: Asset Allocation and Tax Strategy
All rights reserved. No part of this publication/course material may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means (photocopying, electronic, mechanical, recording or otherwise) without the prior written permission of the copyright holder and publisher, applications for which shall be made to the Chartered Professional Accountants of British Columbia, 800-555 West Hastings Street, Vancouver, BC, V6B 4N6.
DISCLAIMER
This course material deals with complex matters and may not apply to particular facts and circumstances. As well, the course material and references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter.
Although the course material has been carefully prepared, neither the Chartered Professional Accountants of British Columbia, the course author and/or firm, nor any persons involved in the preparation and/or instruction of the material accepts legal responsibility for its contents or for any consequence arising from its use.
January 2018
1
Member-Canadian Investor Protection Fund
ODLUMBROWN.COM
Welcome CPABC Chadwick Walker | Investment Advisor, Odlum Brown Limited
Michael Erez | Director, Odlum Brown Financial Services Limited
Average Human Lifetime Each row is one decade Birth
30th Birthday
60th Birthday
Turning 90
Investment Horizons Each row is one decade Birth
25
65
40-year time horizon
Financial Independence Each row is one decade Birth
65
100?
35-year time horizon
13
Price - $50k/year
Retirement Lifestyle Costs
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
25 35 45 55 65 75 85 95 105
Invest $10k per year from 25-65
5% Net Growth Withdraw $50k/year starting at age 65
$0
$100
$200
$300
$400
$500
$600
$700
$800
25 35 45 55 65 75 85 95 105
5% Net Growth Withdraw $50k/year starting at age 65
Invest $10k per year from 35-65
14
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
25 35 45 55 65 75 85 95 105
5% Net Growth Withdraw $50k/year starting at age 65
Investing for Generations
Maximize Gains
Risk
15
Other Considerations
Inflation
Fees
Taxes
Debt
Income
Savings
Risk Tolerance
Fit?
16
Modern Portfolio Theory
Security A: Expected Return = 12%, Standard Deviation = 20%
0%
5%
10%
15%
20%
25%
0% 10% 20% 30% 40% 50%
Security B: Expected Return = 20%, Standard Deviation = 40%
Risk
Return
Standard Deviation vs. Expected Return
17
Optimizing Risk and Return
Portfolio A % B % Return Standard Deviation
1 1 0 12% 20%
2 0.9 0.1 13% 18%
3 0.76 0.24 14% 16%
4 0.5 0.5 16% 20%
5 0.25 0.75 18% 29%
6 0 1 20% 40% 0%
10%
20%
0% 10% 20% 30% 40%
Portfolio Combinations Return
Risk
Are humans perfectly rational?
Asset Allocation
18
BONDS 4% 10%
$32,000 $20,000
$800,000 ROI ~5% EQUITIES
$200,000
BONDS 4% 10%
$20,000 $50,000
$500,000 ROI 7% EQUITIES
$500,000
BONDS 4% 10%
$8,000 $90,000
$200,000 ROI ~9% EQUITIES
$800,000
19
More Specific
Shopping for Bonds
2-Year Government Bond %
0.51%
0
5
10
15
Jan-83 Jan-93 Jan-03 Jan-13
Source: Bank of Canada
20
10-Year Government Bond %
1.73%
0
5
10
15
Jan-83 Jan-93 Jan-03 Jan-13Source: Bank of Canada
0%
5%
10%
15%
20%
25%
Sep-07 Sep-10 Sep-13 Sep-16
High Yield
4.39%
Source: Bank of Canada
Bond Ladder
21
5 Years
2019 Bond @ 1%
2020 Bond @ 2%
2021 Bond @ 3%
2022 Bond @ 4%
2023 Bond @ 5%
$$$$$$ Maturity
2020 Bond @ 2%
2021 Bond @ 3%
2022 Bond @ 4%
2023 Bond @ 5%
$$$$$$ - 2024 Bond @6%, ??
2020 Bond @ 2%
2021 Bond @ 3%
2022 Bond @ 4%
2023 Bond @ 5%
22
After Tax Return Fixed Income $10,000 4% = $400
*Inflation 2% = -$200
*Taxes on $400 *50% = -$200
*Advisory Fees 0.5% = -$50
NET Total = $-50 *Estimated Costs
Why do we need fixed income?
Return of Capital
Oppositely correlated to the markets
Downside protection
Interest income
Equities
Shopping for Equities
23
Index Composition • Index of 6 companies for an exchange
that has 11 companies trading
50
20
20
5
3 1
• Index of 6 companies
• Bigger Company = Bigger Weight
50
20
20
5
3 1
Index Composition
Global Choices
24
Canada S&P/TSX Index
6.4%* Sector Weighting Financials
Real Estate
Materials
Energy
Industrials
Consumer Discretionary
Info Tech
Consumer Staples
Telecom Services
Utilities
Health Care
*annualized over 15 years.
0
5,000
10,000
15,000
20,000
Jan-80 Jan-90 Jan-00 Jan-10
Source: Market-Q
USA S&P 500 Index
0
500
1,000
1,500
2,000
2,500
3,000
1-Jan-80 1-Jan-90 1-Jan-00 1-Jan-10
7.8%*
14.8 2.9
3
5.8
10.1
12.2 24.1
8.2
2
3 13.9
Sector Weighting (%)
Financials
Real Estate
Materials
Energy
Industrials
Consumer Discretionary
Info Tech
Consumer Staples
Telecom Services
Utilities
Health Care
*annualized over 15 years.
Source: Market-Q
Build it
Build a portfolio like an orchestra
25
Build it Financials Real Estate Materials Energy Industrials Consumer Discretionary Info Tech Consumer Staples Telecom Services Utilities Health Care
Odlum Brown Model Portfolio
The Odlum Brown Model Portfolio was established by the Research Department in December 1994, with a hypothetical investment of $250,000. These are gross figures before fees. Past performance is not indicative of future performance. Trades are made using the closing price on the day a change is announced. Data as of Dec. 15, 2017.
1 As of December 15, 2017. The Odlum Brown Model Portfolio was established on December 15, 1994 with a hypothetical investment of $250,000. Performance figures do not include any allowance for fees. Past performance is not indicative of future performance. Trades are made using the closing price on the day a change is announced. 2 S&P 500 Total Return Index in Canadian dollar terms. 3 S&P/TSX Total Return Index.
1
2
3
$250,000
Personal Risk
Time Horizon
Future Goals & Values
Assets to own
Recap
29
Please read our Odlum Brown Limited Disclaimer and Disclosure - It is important! Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from investment banking services. We describe our research policies in greater detail, including a description of our rating system and how we disseminate our research, on the Odlum Brown Limited website at www.odlumbrown.com. This report has been prepared by Odlum Brown Limited and is intended only for persons resident and located in all the provinces and territories of Canada, where Odlum Brown Limited's services and products may lawfully be offered for sale, and therein only to clients of Odlum Brown Limited. This report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject Odlum Brown Limited to any registration requirement within such jurisdiction or country. As no regard has been made as to the specific investment objectives, financial situation, and other particular circumstances of any person who may receive this report, clients should seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies discussed or recommended in this report. This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Please note that, as at the date of this report, the Research Analyst responsible for the recommendations herein, associates of such Analyst and/or other individuals directly involved in the preparation of this report hold securities of some of the issuer(s) referred to directly or through derivatives. No part of this publication may be reproduced without the express written consent of Odlum Brown Limited. Odlum Brown Limited is a Member of the Canadian Investor Protection Fund.
• Consider conversion @ age 65 (full or partial)• If already retired & spouse has lower taxable income• RRIF income ≥ age 65: Pension income splitting & tax credit
• Base RRIF on younger spouse’s age • Lower RRIF minimum withdrawals (see table)• More flexibility & control over taxable income/OAS clawback
RRSP RRIF (Conversion)
21
Refresher
• Originate from Defined Contribution (DC) pension plans
• Cannot withdraw from a LIRA • Must first convert to a LIF or LRIF
• Have minimum AND maximum withdrawal limits
Locked‐in RRSPs (LIRA, LIF, LRIF)
• Once income is needed, consider withdrawing maximum
• Tax impact at you METR?
• Use older spouse’s age when converting to a LIF, LRIF
• Establish higher minimum and maximum withdrawal amounts
Locked‐in RRSPs (LIRA, LIF, LRIF)
Dave and Lisa?
• Maximize contributions as long as possible
• Even during retirement (current tax savings + estate preservation)• Can contribute ‘in‐kind’ (gains triggered/losses denied) • Contribution room is cumulative & includes withdrawals
• No attribution on withdrawals (unlike RRSPs)• Fund TFSAs for spouse and adult children
TFSA
22
INVESTMENTACCOUNTS
Types & Features
FRAMEWORK
How to Allocate Funds
FRAMEWORK
Where to Put Investments
PLANNING TIPS
By Account
Asset Location
Dave & Lisa want to know…How to allocate $45K this year
Invest or pay‐down mortgage?
Which accounts?(RRSP, RESP, TFSA, etc.)
Which investments in which accounts?
Spousal RRSP?
What should Lisa do with her locked‐in RRSP?
Hold assets jointly?
1 4
2 5
3 6
When should they convert their RRSPs to RRIFs? 7
“Know what you own and why you own it.”
Peter Lynch
… and where you own it!
23
Questions?The information contained herein is for general information purposes only and is not intended to provide financial, legal, accountingor tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Limited may affect theapplicability of any matter discussed herein to your particular circumstances. You should consult directly with your financial advisorbefore acting on any matter discussed herein. Individual situations may vary.