The Quest to be 30% Richer

*A quick note – next week I will be discussing the recent market events, but had this written already last week and didn’t want it to go to waste. 

** Performance numbers presented here all come from Questrade’s own website. They also represent the most recent numbers available.

Money Can 

Questrade is Canada’s fastest growing online advisory service that has built its business on the back of a catchy refrain: “Retire up to 30% richer”. There ads are everywhere and the simple and straightforward message has landed with a punch. The principle behind their slogan is that, over enough time, the amount of money you can save in fees by transferring to their online platform can be worth a substantial amount when that saved money is able to compound.

Competing on the price of financial advice has become common place, especially as people have become increasingly comfortable doing more online. Online “robo-advisors” dispense with all that pesky one-on-one business through your bank and have focused on providing the essentials of financial planning with a comfortable interface. Champions of lowering the costs of investing have hailed the arrival of companies like Questrade and Wealth Simple, believing that they would unsure in an era of low-cost financial advice.

Such a time has yet to materialize. For one thing, traditional providers of investments, like mutual fund companies, have learned to compete heavily in price, while an abundance of comparable low-cost investment solutions have given financial advisors a wider range of investments to choose from while being mindful of cost. Meanwhile, because internet companies have a business model called “scaling” which encourages corporations to rapidly expand on the backs of investors before they become profitable, its not clear whether robo-advisors are actually all that successful. Wealthsimple, one of the earliest and most prominent such services has broadened their business to include actual advisors meeting actual people, a decidedly more retrograde approach in the digital age.

Nevertheless, efforts to win over Canadians to these low cost model continue apace, and the market leader today is Questrade. So, what should investors make out of Questrade’s signature line? Can they really retire 30% richer?

Probably not.

First we should understand the mechanics of the claim. Looking through Questrade’s website we can see through their disclaimers that for each of their own portfolios they have taken the average five year returns for categories that align with each portfolio, the average fees for those categories and added back the difference in the costs. So, for their Balanced Portfolio they refer to the “Global Neutral Balanced Category” and the five-year number associated with that group of funds (the numbers seem to be drawn from Morningstar, the independent research firm that tracks stocks, mutual funds and ETFs).

Questrade assumptions
Figure 1 https://www.questrade.com/disclosure/legal-notice-and-disclosures/2018/08/08/questwealth-portfolios-calculator

Thus, they arrive at an assumed ROR of 6.21% for five years, and then project that number into the future for the next 30 years. They also calculate the fee of 2.22% (the average for the category) and subtract that from the returns. And using those assumptions Questrade isn’t wrong. Assuming you received the average return and saved the difference in fees, over 30 years you’d be 30% richer.

Except you probably wouldn’t.

Questrade actually already has a five year performance history on their existing investments, and we can go and check to see how well they’ve actually done. Unfortunately for Questrade, their actual performance in practice is not considerably better than the average return against the categories they are comparing. For the last five years, Questrade’s 5 year annualized performance is 4.92%, less than 0.3% better than the category average of 4.66%.

But wait, there’s more!

Questrade Balanced Portfolio Performance
Figure 2 https://www.questrade.com/questwealth-portfolios/etf-portfolios#balanced

Keep in mind that Questrade’s secret sauce is not the intention to outperform markets, merely to get the average return and make up the difference in fees, but when put into practice it isn’t even 1%, let alone 2% ahead of their average competitors. In fact, we could go so far as to say the Questrade is a worse than average performer since if we assumed the same fees were to apply, Questrade’s performance would be significantly below the average return. In fact, for the purposes of their own history the above performance is shown GROSS of fees. Yes, if you read the fine print you discover that Questrade has not deducted its own management costs from these returns, meaning that the real rate of return would be 4.54%, officially below the average they are trying to beat!

Questrade Extra Disclaimer
Figure 3 https://www.questrade.com/questwealth-portfolios/etf-portfolios#balanced

Fidelity Global Neutral Comparison
Figure 4 This has been taken from Morningstar and compares the B Series Fidelity Global Balanced Portfolio performance against its category, Global Neutral Balanced. Performance for the individual fund is better than the 5 year average of Questrade’s comparable investment, and ahead of the five year average for the category of 4.66%. This should not be construed as an endorsement of Fidelity or any investment they have.

There is a temptation towards smugness and finger wagging, but I think its more important to ask the question “Why is this the case?” The argument for passive index ETFs has been made repeatedly, and its argument makes intuitive sense. Getting the market returns at a low price has shown to beat active management over some time periods. So why would Questrade underperform, particularly when markets have been relatively stable and trending up? I have my theories, but it should really be incumbent on Questrade to explain itself. What does stand out about this situation is that if you are unhappy with your performance THERE IS NOTHING YOU CAN DO ABOUT IT! Questrade’s portfolios represent their best mix, and do not allow you to make substitutions or even really get an explanation for the under-performance. The trade off in low cost alternatives is all the personalization, flexibility and face to face conversations that underpin the traditional advisor client relationship.

Given all the regulations that surround investing, I remain surprised that Questrade is able to advertise a hypothetical return completely detached from their actual returns, but that is yet another question that should be settled by people who are not me. Questrade has some benefits, not least is their low fees, but investors should be honest with themselves about how beneficial low fees are in a world when there are many options and the cost of navigating those options represents their best chance at retiring happy and secure.

As always, if you have questions, need some guidance or just a second opinion, please contact me directly at adrian@walkerwealthmgmt.com

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

COVID-19 is a Black Swan, What Does That Mean?

disease epidemic New coronavirus “2019-nCoV”, handwritten text.

Late last week markets began to take the novel corona virus very seriously, and returns started to walk back from the all time highs earlier in the month. That retreat accelerated this week as COVID-19 virus fears exploded and the potential of a wide ranging global pandemic seemed possible despite the enormous efforts of the Chinese to quarantine and contain the virus. In South Korea, Italy, Iran, Japan, Canada and the United States the virus has appeared in varying states of severity, and are sparking varying degrees of public health responses.

COVID-19 strikes me as a black swan event, an unpredictable outlier that can’t really be planned for. An “unknown unknown”. Governments have plans in place to deal with epidemics, and learn from past outbreaks, but can’t plan for a virus they don’t know about and proves to be better than the precautionary measures already established to contain such events. In the instance of COVID-19, the virus seems very virulent, spreading rapidly but also having a long incubation time. You may not show any signs of the virus, and, in a cruel twist, many people with the disease may only have mild symptoms, making it easily confused with the common cold and less likely for an infected person to seek treatment while being an effective transmitter.

Dow Jones Industrial Average
The Dow Jones Industrial Average over the last month. 

Markets have capitulated to the fear that this virus is dangerous and will have an outsized impact on the global economy, already in a much weaker state than market returns suggested. But like all black swans what happens next will determine how serious it becomes. For my own part I believe the virus is serious, but that the 2% mortality rate may only apply to China, and that it is likely lower with a much larger pool of diagnosed people obscuring the data. This is backed up somewhat by the much smaller number of fatalities in other countries, including Japan and South Korea. What black swans really do is expose a society’s resiliency.

Resiliency is something I’ve discussed before, and it comes into play here. Iran is proving to be one of the more virulent places for the disease, with underreporting of people who have contracted it, a number of government officials who now test positive for it, and a number of cases in foreign countries linking back to Iran, the reality is that Iran’s problem is one of resiliency planning compared to richer countries that have well established protocols for dealing with public health emergencies and the money to dedicate to them. By comparison Iran faces long standing economic sanctions while simultaneously engaging in expensive (and somewhat successful) proxy wars for hegemony in the middle east, ignoring wider investment in public infrastructure.

But resiliency covers a wider range of issues. From an investment standpoint diversified portfolios containing a wide selection of asset classes and geographic allocations are safer because they tend to be more resilient, and not through any confusing magic. Debt, both long term and short term, erode resiliency as they eat away at your ability to respond to new problems while shackling you to existing commitments. In terms of managing the economy, interest rates are also a form of resiliency, and the ability to cut rates or raise them speaks to the strength of an economy. A cursory glance at these issues might give one pause, since Canadians have all time records of debt, and an attempt in 2018 to raise interest rates for the wider health of the economy led to a rapid sell off at the end of the year, while in 2019 central banks cut rates almost everywhere to prop up a softening global economy.

COVID-19 is a significant challenge that I believe the world is up for, but as a black swan I suspect its impact will be felt more in its economic fallout. As we move into the second quarter of the year a clearer picture will emerge at just how serious the economic impact of the virus, and efforts to contain it, really have been. Given some of the existing issues within the economy, as well as those currently being stressed by the fraying of international trade, the corona virus has the potential to push economies into recession. At which point all citizens should ask, just how resilient is my country, and just how resilient am I?

Have questions about the resiliency of your portfolio? Please feel free to give me a call or send an email.

Our office: 416-960-5995

My email: adrian@walkerwealthmgmt.com

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

The Threads of 2020

The end of the year always brings on reviews of the biggest stories, but its probably more accurate to say that the biggest stories of any year are really the consolidation of events and ideas from many years prior. So as we look ahead, what events from the past might come to their rightful end in 2020?

Fragile Worlds and Global Challenges

Corona 1
Figure 1 People wearing protective masks arrive at a Beijing railway station on Tuesday to head home for the Lunar New Year. NICOLAS ASFOURI/AFP via Getty Images

News of the rapid spread of the “novel coronavirus”, the dramatic quarantining of multiple Chinese cities and the wall to wall media coverage have made the new disease an inescapable part of life. But while the ultimate severity of the virus remains unknown, the larger impact on the global economy is slowly coming into focus. An interconnected planet that is dependent on economies functioning half a world away can find itself in serious trouble when 40 – 50 million people are suddenly quarantined. Consumer spending in China has dropped off significantly, and expectations are that the government may have to take dramatic action to ultimately support the economy. However, the impact of such a large public effort will not only hurt the Chinese economy, but may hamper the already minor commitments that they have made to the US in the new “Phase 1 Treaty”, which will also hurt the US economy, one that has already showing signs of weakness over the last year. The long-term threat of the corona virus may not be its impact to our bodily health, but to financial health.

The Missing Inflation

For years economists and central bankers have been puzzled by the lack of inflation from the economy. No amount of economic growth or declining unemployment seemed to move the needle on inflation, and it remained stubbornly and frustratingly at or below the 2% target most banks wanted.

Labor Participation RateOne explanation for this is that the labor participation rate has been very low and that the unemployment rate, which only captures workers still looking for work and not those that have dropped out of the workforce altogether, didn’t tell the whole story about people returning to the workforce. The result has been that there has been an abundance of potential workers and as a result there really hasn’t been the labor shortage traditionally needed to begin pushing up inflation.

But there are some signs that inflation is coming back to bite. First, and interesting article from the CBC highlighted just how many vacancies there are in trucker  . There is currently a shortage of 22,000 drivers, and that’s expected to climb to 34,000 in the next few years. Trucking pays well, but maybe it doesn’t pay well  enough. In a universe where many Canadian university educated citizens can’t get work outside of Starbucks, how is it that people haven’t jumped at the chance to get into this lucrative practice?

Trucking isn’t the only trade lacking employees. Nursing and pilots are another two trades that are facing severe shortages. How long can some major industries resist raising wages as shortages start to pile up?

Canada’s Economic Problems

Insolvency RatesThe short version of this story is that Canadians are heavily in debt and much of that debt is sensitive to interest rates. Following a few rate hikes, insolvencies started to creep up in Canada and 2020 may be a year in which the historically high personal debt rates of Canadians start to have an impact on the Canadian economy. According to the Toronto Star and CTV News Canadian insolvency rates are   highest they’ve been since the financial crisis, only this time there isn’t a crisis.

As I wrote before Christmas, economic situations create populist movements, and if Canadians are facing a growing economic problem, widespread and with many Canadians vulnerable we should be mindful that an economic problem may become a political one.

A Crisis in Education and Generations

Student Debt w SourceWalking hand in hand is the increasing cost of education, and the declining returns it provides. In the United States the fastest growth in debt, and the highest rate of default is now found in student debt. According to Reuters the amount of unpaid student debt has doubled in the last   to about $1.5 trillion. The financial burden can be seen in the age of first-time home buyers which has been creeping up over the previous decade and is now pushing 35. The primary step in building a life and the pushing of that life off explains some of the current disaffection with politics and economy that has led a growing number of younger people to hold a favorable view of Communism.

Debt and DelinquencySource for consumer loan growth

The Recession Everyone is Waiting For

Following three years of growing trade wars, a decade of uninterrupted economic growth, and market valuations at all time highs, the expectation of a recession has reached a fever pitch. With 2020 being an election year it seems likely that Trump will try and sooth potential economic rough patches, the first of which will be with China, where his trade war is as much about getting a better deal as it is about winning political points with his followers. The first phase of the trade deal is to be signed very soon but details about that deal remain scant. It’s likely that the deal will do more for markets than the wider economy as there is little benefit for China to go for a quick deal when a protracted fight will better work to their advantage.

MSCI vs PriceEfforts to hold off an actual recession though may have moved beyond the realm of political expediency. Globally there has been a slowdown, especially among economies that export and manufacture. But perhaps the most worrying trend is in the sector that’s done the best, which is the stock market. Compared to all the other metrics we might wish to be mindful of, there is something visceral about a chart that shows the difference in price compared to forward earnings expectations. If your forward EPS (Earnings Per Share) is  expectated to moderate, or not grow very quickly, you would expect that the price of the stock should reflect that, and yet over the past few years the price of stocks has become detached from the likely earnings of the companies they reflect. Metrics can be misleading and its dangerous to read too much into a single analytical chart. However, fundamentally risk exists as the prices that people are willing to pay for a stock begin to significantly deviate from the profitability of the company.

Real Price vs Earnings
Figure 2 http://www.econ.yale.edu/~shiller/data/ie_data.xls

Market watchers have been hedging their bets, highlighting the low unemployment rate and solid consumer spending to hold up the markets and economy. But the inevitability of a recession clearly weighs on analysts’ minds, and with good reason. In addition to the growing gap between forward earnings expectations and the price people are willing to pay, we now see the largest spread between the S&P 500 Stock price Index and the S&P 500 Composite Earnings (basically more of the above) ever recorded for the S&P 500. While this tells us very little about an imminent recession, it tells us a great deal about the potential for market volatility, which is high in a market that looks expensive and overbought.

Climate Change

Picture1
Photo by: Matthew Abbott/The New York Times via Redux

Climate change has garnered much attention, and while I believe that more should be done to deal with the earth’s changing biosphere, I fear that the we are having a hard time finding the most meaningful ways of doing that. In the wake of our inaction we will witness the continued economic costs of a changing environment.

Australian TemperatureAustralia, which has had years of heat waves, has recently faced some of the worst forest and brush fires imaginable (and currently bracing for more). At its peak in early January, an area of land roughly the twice the size of Belgium was burning, and an estimated billion animals had died. Some towns have been wiped out and the costs of all this will likely come somewhere into the billions once everything has been totaled. What’s important, and the bit hard to get your mind around, is that this is not A FIRE, but is a season of fires and there were more than 100 of them. And it is happening every year. It’s now a reoccurring problem in California, as well as Western Canada, and in the rainforests of Brazil. As I’ve said before, the story of climate change is about water, and the cost of that will be high.

Australia Burning
Figure 3 Image copyright EU COPERNICUS SENTINEL DATA/REUTERS

More of the Same

There is a lot of focus on the growing disparity between the very wealthiest and poorest in our society. This renewed interest in the level of inequality is a conversation worth having but is frequently presented in a way that isn’t helpful. For instance it’s been pointed out that the concentration of wealth at the very top of society has only continued to intensify, and a recent report from the Canadian Centre for Policy Alternatives (Published January 2nd, 2020)  points out that a “top 100 CEO” saw their pay increase 61% over the last decade. However, to muddle matters, the “top 100 CEOs” remains a fairly non representative group and within Canada wealth concentration for the top 1% has been falling since  2007 (which also represented the highest concentration since 1920).

Trillions of Wealth

Canadian 1% Wealth

This isn’t really about wealth inequality, so much as how unhelpful it is to sling statistics back and forth at one another every day endlessly. A better way to understand what’s happening is to see where is winning rather than who is winning. In the United States, which has seen a long period of job growth, 40% of new jobs were created in just a handful of cities (20 to be precise).

City Jobs
Figure 4 Source: Reuters analysis of Bureau of Labor Statistics data

Those cities, like Seattle, Portland, LA, Atlanta, Austin, Dallas, and, Miami, have all been rewarded in the 21st century, while many of the remaining 350 metropolitan areas had to share the other jobs, and many of those areas saw their share of jobs decline in the same period. An even smaller group of five cities have picked up the bulk of new innovation businesses, a key issue as traditional industries like retail and manufacturing falter, but Computer System Designers are thriving in the new economy. The issue of wealth inequality is not going to be easily dealt with by simply taxing billionaires. Inequality is a geographic story and one likely to persist into the future.

City Job Share

Conclusion

The stories of 2020 are likely going to hit many of the themes we’ve been touting over the last 8 years. Cities, affordability, resiliency, aging populations, environmental change and reckless speculation will remain central to news reporting. But the biggest story will likely be how well we responded to these issues…

Did I miss anything? Let me know! And as always if you have any questions, wish to review your investments or want to know how you can address these issues in your portfolios, please don’t hesitate to email me! adrian@walkerwealthmgmt.com

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Is Canada’s Populism Moment Over, Or Just Beginning?

canada flag and fist

This year possibly saw Canada’s most pointless election. Though it was meant to be A VERY SERIOUS AFFAIR, the election was a gong show misleading personal attacks, the exposure of embarrassing histories and the revelation that the Prime Minister of the country couldn’t say how many times he wore blackface. Amidst all of this was the arrival of Canada’s first angry populist party under the leadership of Maxime Bernier. Bernier started his People’s Party of Canada in response to narrowly losing the leadership of the Conservative Party of Canada, in a contest that many within the party saw as rigged against him. Bernier may have agreed, and having crafted a libertarian brand as “Mad Max” thought this was the time to strike out on his own (I met Bernier during his run for leader of the CPC and was surprised at how short he was. I’m not saying that Bernier started another party due to small man syndrome, but his loss to the 6’3” Scheer may have played some roll). Maxime BHis party was a grab bag of disaffected curmudgeons and, unsettlingly, a number of quasi-racists who were obsessed with immigration.

The outcome of the election seemed to put Canada’s populism to rest, such as it was. A short lived attempt to start a “yellow vest” movement here, like in France, failed badly and tainted Andrew Scheer, the only politician to make overtures to various populist movements. Maxine Bernie’s party failed to win a single seat, including his own, and concerns that a populist wave was crashing down on Canada seemed unfounded. And yet shortly after the election we seemed embroiled in “WEXIT”, a nascent movement for Western Independence.

WEXIT probably won’t go anywhere, but Canada does have serious problems in the west that the much of the rest of the country seems disinterested in, and if left unaddressed could fuel years of populist outrage and self destructive behaviour. For instance, where you aware that mortgages more than 90 days in arrears in Alberta and Saskatchewan were now wildly out of step with the rest of the country?

Mortgages

Or that the unemployment rate among young men in Alberta had now reached 20%? For much of the last two decades Alberta has been a major engine of economic growth for the country and a source of opportunity for people across Canada. Today it has been reduced to the status of a Spain or Portugal (albeit with better financials).

Unemployment ALberta

51A5iiYoarL._SX324_BO1,204,203,200_In their book “Revolt on the Right: Explaining Support For The Radical Right in Britain” by Matthew Goodwin and Robert Ford, the authors note that the rise of populist UKIP party is “not primarily the result of things the mainstream parties, or their leaders, have said or done…instead, is the result of their inability to articulate, and respond to, deep-seated and long-standing social and political conflicts”.

This problem has been exasperated by an increasing focus on middle-class swing voters who have become seen as central to political success compared to people who have been considered “left behind” in a political and economic sense. They go on to point out that the major parties have “avoided high-profile efforts to mobilize the concerns of the ‘left behind’ voters because both parties have concluded, that electoral success or failure will depend on the support of educated middle-class voters, who hold a very different set of values and priorities.”

This rings particularly true where the priorities of Alberta have be seen to be dismissed by the federal government (despite the acquisition of a pipeline) which has rushed to the aid of an Oshawa car plant and was so embroiled in helping SNC Lavalin it led to a damaging scandal. Over the last two elections Alberta looks increasingly isolated, a sea of blue in a country of red, more politically hegemonic and less diverse than the rest of the country, single-mindedly focused on one industry to the detriment of everything else. For its part Alberta feels under siege, suspicious of political parties that would sacrifice their economic future for environmental priorities they now regard as suspect.

Canada 2015Canada 2019

In an article for The Atlantic in January of 2018, David Frum notes that “If conservatives become convinced that they cannot win democratically, they will not abandon conservatism. They will reject democracy.” The situation isn’t quite that dire for Western Canada, but I think that if political parties cannot learn to articulate and respond to deep seated social and political conflicts in Canada, western Canadians will not abandon their own self interests, but they might abandon some of the tenants of confederation.

Over the last few years the rise of populism has frequently been treated like some kind of fever waiting to break, or a tide that must eventually recede. From a political standpoint this makes some sense, as political historian Richard Hofstander had noted about third parties in the US; “challenger parties are like bees: once they have stung the system they quickly die.” But political upheavals and realignments do happen, and with Brexit now almost a certainty and confidence growing that Trump may win a reelection despite impeachment our recession of democracy may be more prolonged than we’d like to believe.

As most people have noted our current situation has a great deal to do with the events of 2008, which a decade on has left a lasting economic impression on society. Canada sidestepped the worst of 2008 and has enjoyed relative economic strength and political stability. Mostly. But with Canadians being one of the most indebted within the OECD, its worth asking the question what will the rest of Canada look like if we face a serious economic crisis? Will the words “peace, order and good governance” still define the country, or will we awaken a more politically agitated populace? One that has less tolerance for slow and steady results and is far less kind to politicians that seem incapable of addressing major issues?

Sex and Education and Wages

Insolvency RatesMany populists already exist in our politics. Issues around education, housing and debt remain hot buttons for the electorate. And yet our last election spent far more time focused on a speech by Andrew Scheer from over a decade ago. Does that seem like a political class articulating and responding to long standing and deep seated issues, or one that has learned to master the art of getting elected? Education costs continue to climb and yet the return to students is considerably lower, and prospects much worse for those with only high school diplomas. Debt in Canada has continued to rise, a story that seems evergreen, but insolvencies have also started climbing. Currently insolvencies remain low overall, but given the large amount of Canadian debt, what might it take to push people over the edge? Which politician can honestly say they’ve got a good plan to deal with these problems?

So, is the populist tide turning? I think it is too early for us to say, and Canadians should be wary of people arguing that Alberta’s WEXIT is a silly tantrum. Instead we should watch with a cautious eye towards the West. Where Alberta goes we may well follow.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

 

If I were the minister of Middle-Class Prosperity

Save the Middle Class

Launched to much derision and the collective snort of Canada’s journalist class, the government introduced a new cabinet position, “Minister of Middle-Class Prosperity”. Shockingly the new minister seemed incapable of defining what the middle class actually is, and in an effort to clarify her earlier non-position, went on TV to describe understanding the middle class as different things to different people that needs to be viewed through different lenses.

This answer, such as it was, was uniquely terrible since any applied thought to the question of “middle class prosperity” should yield several interesting ideas that deserve close examination.

For instance, an office focused on middle class prosperity might provide a useful take on inflation in terms of how it affects the middle class. Rather than relying on the aggregate rate that economists talk about at national levels, some clarity might come in about where that inflation is felt, like in housing, child rearing and education. We might also find something useful to say about savings and retirement, both of which are going to be increasingly serious questions into the very near future.

But let’s start with the basics. What is a middle class? First, the middle class is a result of an industrialized society. Though there is evidence of times of improving and deteriorating living conditions for humans in our pre-industrialized past, sustained and persistent improvements in living standards exist as a result of industrialization. This is not just because people got richer (and skills became more specialized) but because the cost of things dropped.

This really picked up steam after the Second World War when Western nations went toe to toe with Soviet command economies and showed, despite all their inequality, that more prosperity for more people came about as a result greater innovation in production in the pursuit of reducing prices. Yes, many people had good jobs, but luxury items like refrigerators, dishwashers, and microwaves all became standard kitchen appliances, as did (in time) TVs, cell phones and computers because prices for those items have been in free fall since the 1950s.

Historical and Predicted Prices

If we are looking for a definition of the middle class we could do worse than something along these lines: “The middle class represents a working sector of our society that is sufficiently monetarily rewarded to save for future financial stability, retains ample discretionary income in the present, and can reasonably aspire to help their future generations.” Threats to the middle class, both to people trying to enter it and to those trying to maintain their status within it, come from the erosion of the cost effectiveness of certain services. Housing, education and long retirements threaten this class of people and some of their ills are obscured by how we understand and talk about the economy.

Consider for instance why we talk so much about taxes. Taxes represent one of the few and very clear levers that a government can pull to change personal finances. They can take less money, or they can take more. As of this week the Liberal government has promised another “middle class tax cut” that should leave an average middle class Canadian $300 richer every year, or $600 for a family. Not bad, and for an individual that works out to being 25% of one month’s rent in Toronto for a single bedroom (average) or three weeks of groceries for the average Canadian family! If you are struggling as a Canadian family despite two good jobs, its hard to imagine that this will make or break a retirement or fund a university tuition.

In a survey done by BDO, 2047 Canadians were asked about their personal finances. The results were less than encouraging. 57% were carrying credit card debt and a third couldn’t pay off their short-term credit. 39% said they had no savings for retirement and 69% said they didn’t have enough savings to get through retirement. These findings match repeated surveys and studies done over the past decade that continue to suggest that Canadians are simply not saving enough and are drowning in debt.

Debt Issues

Small tax cuts seem unlikely to fix problems that look like this, and I think its important to note that solutions to these problems are not readily apparent. It should also be noted that being middle class should not mean that you are always financially whole and never struggle. Part of the reason that the middle class has financial issues is because it strives for a life above mere subsistence. Its goals are materially aspirational, and people live their lives according to that aspiration.

A more productive focus should be on helping people enter the middle class. Far too much energy has been dedicated to using houses to boost middle class wealth, both through restricting development to preserve neighbourhoods, and relying on the equity within homes to boost standards of living. This is the wrong place to hoard wealth and it should be replaced with more aggressive home development within cities to boost density, improve services, and reduce the price of homes. Just as importantly the role of higher education should go under a microscope. The costs of University have jumped as more Canadians get degrees and those degrees are worth less in the market. Canadian parents regularly save for children’s education, to the detriment of their retirement savings. The cost of that education is expected to be over $120,000 for a four year degree very soon. Attacking the issue of education head-on would be an enormous help in easing access to middle class security.

Lastly, dealing with debt should be a priority. Lending should have tighter restrictions, especially for younger Canadians in their early 20s when their financial needs are lower, and a state run bank set up to help Canadians get out of debt (the use of which should preclude any other financial lending) would be an enormous asset in terms of allowing Canadians get on going debt help and learn to better manage budgets and connect people to financial help.

Far from having little idea of what constitutes the middle class, we are, if anything, too certain of what a middle-class life looks like and the path to getting there. This is a moment when we should be experimenting with how we create a growing middle class, not calcifying a particular version of life that no longer fits a world that has dramatically changed since the 1950s. A minister for “Middle Class Prosperity” need not be a pointless fluff position making vague pronouncements. Instead it could be a cabinet position that spearheads exciting new ways to improve access to financial security and create paths to long term growth.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

When Only One Thing Matters

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In my head is the vague memory of some political talking head who predicted economic ruin under Obama. He had once worked for the US Government in the 80s and had predicted a recession using only three economic indicators. His call that a recession was imminent led to much derision and he was ultimately let go from his job, left presumably to wander the earth seeking out a second life as political commentator making outlandish claims. I forget his name and, so far, Google hasn’t been much help.

I bring this half-formed memory up because we live in a world that seems focused on ONE BIG THING. The ONE BIG THING is so big that it clouds out the wider picture, limiting conversation and making it hard to plan for the future. That ONE BIG THING is Trump’s trade war.

I get all kinds of financial reports sent to me, some better than others, and lately they’ve all started to share a common thread. In short, while they highlight the relative strength of the US markets, the softening of some global markets, and changes in monetary policy from various central banks they all conclude with the same caveat. That the trade war seems to matter more and things could get better or worse based on what actions Trump and Xi Jinping take in the immediate future.

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Now, I have a history of criticizing economists for making predictions that are rosier than they should be, that predictions tend towards being little more than guesses and that smart investors should be mindful of risks that they can’t afford. I think this situation is no different, and it is concerning how much one issue has become the “x-factor” in reading the markets, at the expense of literally everything else.

What this should mean for investors is two-fold. That analysts are increasingly making more useless predictions since “the x-factor” leaves analysts shrugging their shoulders, admitting that they can’t properly predict what’s coming because a tweet from the president could derail their models. The second is that as ONE BIG THING dominates the discussion investors increasingly feel threatened by it and myopic about it.

This may seem obvious, but being a smart investor is about distance and strategy. The more focused we become about a problem the more we can’t see anything but that problem. In the case of the trade war the conversation is increasingly one that dominates all conversation. And while the trade war represents a serious issue on the global stage, so too does Brexit, as does India’s occupation of Kashmir (more on that another day) , the imminent crackdown by the Chinese on Hong Kong (more on that another day), the declining number of liberal democracies and the fraying of the Liberal International order.

This may not feel like I’m painting a better picture here, but my point is that things are always going wrong. They are never not going wrong and that had we waited until there were only proverbial sunny days for our investing picnic, we’d never get out the door. What this means is not that you should ignore or be blasé about the various crises afflicting the world, but that they should be put into a better historical context: things are going wrong because things are always going wrong. If investing is a picnic, you shouldn’t ignore the rain, but bring an umbrella.

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The trade war represents an issue that people can easily grasp and is close to home. Trump’s own brand of semi-authoritarian populism controls news cycles and demands attention. Its hard to “look away”. It demands our attention, and demands we respond in a dynamic way. But its dominance makes people feel that we are on the cusp of another great crash. The potential for things to be wiped out, for savings to be obliterated, for Trump to be the worst possible version of what he is. And so I caution readers and investors that as much as we find Trump’s antics unsettling and worrying, we should not let his brash twitter feuds panic us nor guide us. He is but one of many issues swirling around and its incumbent on us to look at the big picture and act accordingly. That we live in a complex world, that things are frequently going wrong and the most successful strategy is one that resists letting ONE BIG THING decide our actions. Don’t be like my half-remembered man, myopic and predicting gloom.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

What’s Next? (And When Will It Happen)

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Talk of recession is in the air and amongst my clients and readers of this blog the chief question is “when”?

Ever since Trump was elected, questions about when “it’s going to happen” have been floating about. Trump, an 800-pound gorilla with a twitter addiction, has left a predictable path of destruction and the promise of more chaos always seems on the horizon. It should not be surprising then that investors have been waiting with bated breath for an inevitable correction.

Those predicting imminent doom got a little taste of it last week when markets convulsed and delivered the worst day of the year so far, shedding a dramatic 800 points off the Dow Jones. Globally the news hasn’t exactly been stellar. Germany, Italy and France are all showing a weakening economic outlook, which is to say nothing of Great Britain. Despite three Prime Ministers and two deadline extensions, the nation has yet to escape its Brexit chaos and is no closer to figuring out what to do about Northern Ireland. China too is facing a myriad of problems. Trump’s tariffs may be making American’s pay more for things, but it does seem to be hurting the Chinese economy. Coupled with the persistent Hong Kong protests and its already softening market, last week the Chinese central bank opted to weaken the Yuan below the 7 to 1 threshold, a previously unthinkable option aimed at bolstering economic growth.

In all of this it is the American economy that looks to be in the best shape. Proponents of the “U.S. is strong” story point to the historic low unemployment and other economic indicators like consumer spending and year over year GDP growth. But this news comes accompanied with its own baggage, including huge subsidies for farmers hit by Chinese import bans and other trade related self-inflicted wounds. This issue is best summarized by Trump, who himself has declared that everything is great, but also now needs a huge rate cut.

Trump TweetThe temptation to assume that everything is about to go wrong is therefore not the most far-fetched possibility. Investors should be cautious because there are indeed warning signs that the economy is softening and after ten years of bull market returns, corrections and recessions are inevitable.

But if there is an idea I’ve tried to get across, it is that prognostication inevitably fails. The real question that investors should be asking is, “How much can I risk?” If markets do go south, it won’t be forever. But for retirees and those approaching retirement, now ten years older since the last major recession, the potential of a serious downturn could radically alter planned retirements. That question, more than “how much can I make?”, or “When will the next recession hit?”, should be central to your conversations with your financial advisor.

As of writing this, more chaotic news has led Trump to acknowledge that his tariff war may indeed cause a recession, but he’s undeterred. The world is unpredictable, economic cycles happen, and economists are historically bad at predicting recessions. These facts should be at the center of financial planning and they will better serve you as an investor than the constant desire to see ever more growth.

So whether Donald Trump has markets panicked, or a trade war, or really bad manufacturing numbers out of Germany, remember that you aren’t investing to do as well as the markets, or even better. You’re investing to secure a future, and ask your financial advisor (assuming it isn’t me) how much risk do you need, not how much you’ve got.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Making Kids Money Smart, Reprise

Little girl withdrawing money form ATM with help of mother.

Some time back I had written about how we could better prepare children to handle money responsibly, how to help establish good financial habits and why that was important. You might have thought that banks would have played a role in that education, but I failed to talk about them and what positive (and negative) aspects they can play when it comes to a child’s money intelligence.

In theory banks should be the obvious first stop when it comes to talking about money and yet they rarely are. They may not even be helpful. This is partly because banks have long since given up being a waystation for protecting money from the general economy. While banks themselves have always had a central part to play in lending and growing the economy, the roll of doing that off the back of people who are housing their savings for a rainy day has been replaced by the desire to more quickly facilitate economic activity. Whereas banks were once a speedbump on the road to making a purchase, today they occupy the chief role of facilitating that purchase. No one would dare deposit money with a bank that did not provide debit cards, credit cards and easy online financial transactions.

Being money smart though has a lot more to do with instilling patience and setting goals, not immediately reacting to every consumer temptation. But a teenager with a bank account is not going to find that he or she is hindered much by their savings account. Furthermore, they are unlikely to see the benefits of keeping money in a savings account since there is little growth to be offered. This gives banks a paradoxical role in your child’s financial education, one that offers little incentive to save while facilitating bad financial choices.

For instance, TD Bank offers a Youth Account, a basic savings account for children up to the age of 18. There’s no fees, unlimited transactions per month and minimal interest rates for savers at 0.05%, or 50₡ for every $100. However, a child of 12 will receive a debit card with the Visa Debit system and a daily limit of $25 or $50/day. Meanwhile Scotiabank’s Getting There Savings Account offers similar low fees and minimal interest, but throws in 2 free Interac transactions per month and Scene Reward Points for the movies. The lesson banks teach kids is that putting money in the bank helps buy things they want whenever they want it.

For parents who opened an account for their children when they were small it may be a surprise that banks will send teens and pre-teens bank cards. And even approaching a bank about what can and cannot be done with a bank card may not offer up much help. I went to three separate banks to ask about their youth accounts and was frequently met with several “umms” and “ahhs” when I pressed for details. At one bank I was assured that even though the bank card was a “Visa Debit” that card could not be used to buy items online (which is what the Visa Debit system does). When I pressed for confirmation that this was the case the person disappeared to consult with other employees before returning and confirming that online purchases would be allowed. Financial limits are also not particularly inspiring. A $25 limit per day totals pretty quickly, and parents may not realize what that money is going towards since online purchases can be easily overlooked.

And yet.

This is also the system that we live in. Children should be raised to understand that there will be few breaks when it comes to making bad financial choices. Banks and credit card companies will happily provide debt to those who can barely afford it and defend themselves with impenetrable multi-page legal documents. Engaging with this system is essential to beating it.

So what can parents do?

As I wrote back in 2015 the best course of action is to do planning with kids to help establish good habits. Giving kids an allowance in exchange for chores isn’t a bad idea, but it might make more sense to both expand the money that is given, and then set up automatic withdrawals to cover expenses. Rather than receive $20/week as an allowance, consider $50/week and automatically take $30 back for RESP contributions. Or up it even further and charge them room and board. The experience of seeing financial responsibilities coming ahead financial luxury would establish a good habit of the real costs of living.

Another idea would be to sit and plan the purchase of a large item together that a child wants. Maybe it’s a video game system or a subscription of some kind. Go through the budgeting process together and figure out how many weeks it would take to get the item while also factoring money in that time for usual expenses like eating out with friends and going to movies (people still go to the movies right?). Invariably good budgeting forces us to question what we’re doing and whether it makes sense, so the action of picking an item and working towards it will go a long way to either validating those wants or rethinking what to do with that cash.

If you can convince your child to save and budget, help them as well consider alternative things to do when it comes time and they’re tempted to spend the money they were meant to be saving. Budgeting should help provide a passage to success and being left home alone while their friends are out having a good time will be hard.

Lastly, take your kids to the bank and have a meeting with someone together about the ins and outs of their youth account. Parents should know what is and is not allowed and not assume that simply because they opened the account 8 or 9 years ago, they understand what that account does or does not allow.

Financial planning remains an unpopular pastime, and few enjoy the responsibility of dealing with money. This may have more to do with how out of control Canadians feel with regard to their expenses and how much debt we carry. But as parents we should be looking for every opportunity to teach our children some of the bitter truths about money, debt, banks and budgets. Nobody else is.

As always, if you have questions about fees, performance or your financial future, please don’t hesitate to give me a call or send a message.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared  by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

The Cost of Advice

Everyone’s focused on the cost of investing, they should be looking at the cost of not having help.

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I regular question I receive is whether fees are to high. This isn’t a perplexing question, it always makes sense to see whether you could, or perhaps should, be paying less. But from a financial planning perspective the questions seem to dominate an awful lot of initial meetings that I have.

For clarity, I think its important to point out that within my own practice we’ve done a lot to increase transparency about our fees and have done what we can to make costs explicit and earn our keep. Years ago, while working for a mutual fund company, I was shocked to learn that some advisors never wanted their clients to know how they were getting paid, or how much. This always struck me as a poor business practice and given the public focus on the expense of financial advice means that I’m not alone in that assessment.

The focus on fees has also paid results to investors. While I have no data on Canada, in the United States mutual fund fees have dropped by nearly 50% since 2000. Canada has been following suit (to what degree I don’t know) but I haven’t had a meeting with a mutual fund company in the last few years that hasn’t spent time highlighting the cost of the investments, or a recent cut to MERs. Much of this has been aided by the arrival of ETFs (Exchange Traded Funds) which have also been on a mad rush to cut costs. Today there are even 0% cost ETFs, although the true costs of those products remains opaque.

And yet, much of this seems like a secondary problem. Costs have rapidly dropped but little attention is being paid to more worrying trends. Investors do badly without help, and financial advice is worth a great deal more than the cost of receiving it.

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The 2019 Quantitative Analysis of Investor Behavior is the most recent annual report produced by Dalbar (Dalbar is an independent provider of business practices in the financial space – you can learn about them HERE), which looks to compare investor behavior against market returns. Produced annually the report stretches back decades and its findings are conclusive. People do badly as investors, and frequently stay just ahead of inflation and well behind market returns. For instance, in 2018 the S&P 500 had a -4.38% return, while the average equity fund investor averaged -9.42%, and the Average Equity Index Fund Investor returned -7.22%.

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These results speak for themselves, but it shows that the greatest enemy to maximizing investor returns are not the fees, but the behavior of investors. Even when investors hold low cost index ETFs, they still underperform markets. The reasons for this are complex, but have much to do with the human mind and its limitations in facing an uncertain future (best captured by the growing field of behavioral economics). A good example of his is found in the report’s Guess Right Ratio, a ratio based around the inflows and outflows of funds to determine how often investors have correctly anticipated the direction of the market. You might be surprised to learn that investors have guessed correctly 50% of the time over the last 13 years, but that guessing right didn’t translate into more money, since investors guessed wrong in a larger magnitude than they ever guessed right (in other words people made bigger bets when guessing wrong) and one wrong guess would wipe out months of correct bets.

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If there is a place where investors and advisors need to improve, it is how much work is being done for investors at all. The rise of “Robo-Advisors” seemed to solidify a type of investor experience, one in which 75% of investors admit to only communicating with their advisor once or twice a year, and up to 68% never spend more than an hour with their advisor a year, and 31% of investors have never discussed their investment goals. That gap seems one worth closing, and one that cannot be capably done through automated systems, or through impersonal financial practices. The cost of good financial planning seems to be worth it if it improves your returns, gives you comfort in your long term planning and helps make your retirement a success.

As always, if you have questions about fees, performance or your financial future, please don’t hesitate to give me a call or send a message.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared  by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.