The Fleecing Of Naive Canadians Continues

RBC hits record $12.4 billion!

"The Toronto-based bank saw particularly rapid growth from it's wealth management business for the year ended Oct. 31, as the unit recorded a 23-per-cent increase in its earnings compared to fiscal 2017, rising to nearly $2.3 billion".

The wealth management business generates huge revenues garnered from managing their clients money. Mostly earned from the fees (hidden or not) that they charge their clients. A 23% increase over one year. Think about that. How have your investments fared over the last year?

As my friend Larry Bates, in his new best-seller, Beat The Bank, so succinctly puts it "Old Bay Street bosses require the vast majority of their national sales force to offer only products with high, and often hidden, fees."

For fun, lets look at the RBC balanced fund:

The value of this mutual fund is over $5 Billion (as of Oct. 31, 2018). $5 Billion of RBC client money.

As best as I can tell, over the last year, to Oct. 31, 2018 this fund has brought a return for investors of -3.8%. while at the same time charging investors in the fund 2.15% (MER).

Here is what they say about the MER (note the fine print!):

1) no sales charges (no load)

2) You don't pay expenses directly. They affect you because they reduce the funds return. (i.e. you don't get the tax deduction).

I think Larry has a point. 

"Their relentless marketing machine plays on this insecurity, bombarding Canadians with a smokescreen of complexity, bewilderment, foreboding, false salvation aimed at convincing you to:

1) Distrust yourself (you are incompetent)

2) Trust us (we will save you)"

And we pay dearly for it.

I do try to spread the message that there are equally protected alternatives for investors and they can be "Do It Yourself" (DIY), "Assemble It Yourself" (AIY), Robo (no personal service) or if you like a human being to care for you (at a very reasonable cost) and with fiduciary responsibility to you, a portfolio management firm (like High Rock), who can provide you with a plan (Wealth Forecast prepared by a Certified Financial Planning pro), an investment strategy for the long-term (you are likely going to have many years left on this planet) and guide you with regular monitoring, updating and perhaps even hand-holding through the more difficult moments so that you can stick to your plan.

Save yourselves (and help out your friends too) from the high cost, low touch world of the very profitable "Old Bay Street" banks and financial institutions. Seek out the alternatives. 

Consumer Prices And Your Wealth Goals

A key component in projecting the growth of your wealth is trying to anticipate how inflation will impact your cost of living over the course of the rest of your life:

Growth of your money (average annual return over the rest of your life) less the rate of inflation (average annual increase in the cost of living over the rest of your life) of your lifestyle expenses. 

What you consume, how much you consume and where you do your consuming are all important in getting a handle on what to expect for future cost of living increases. 

Statistics Canada tells us that the "average" household saw a 2.4% increase in its basket of goods over the last 12 months ending in October.

What you consume: (according to StatsCan) the average Canadian household consumes like this:

Transportation costs which account for about 20% of the average household's spending rose at a rate of 4%. Gasoline prices were up 12%.

Where you consume:

In Ontario, energy prices fell 2.4% following the termination of the carbon cap and trade program. Gas prices fell 4%.

However, all of this may be moot because the drop in oil prices to close to $US 50 per barrel (West Texas Intermediate crude oil) recently, if sustained could push CPI inflation lower by close to 1 full percentage point.

The volatility in the prices of energy and food from month to month forces the Bank of Canada to try to come up with formulas for a less volatile "core" CPI number which they monitor for policy making (interest rate setting) purposes:

For our client Wealth Forecasting, we make the assumption (unless we adjust it to meet a clients very specific requirement) that inflation will likely grow at a rate of 2.5% into the future.

In our equation for the growth of their / your money, the average annual return over the rest of our clients lifetime needs to exceed 2.5%.

The risk-free rate of return (a 90 day Government of Canada T-bill) will get you bout 1.7% (at the wholesale level, before fees and taxes) at the moment. That will not get you ahead of the annual cost of living increase.

In order to beat that annual increase in your cost of living, you are going to need to take risk.

How much risk?

Enough to beat your inflated cost of living, but not too much to jeopardize the integrity of your investments.

You can try to do it yourself (DIY) or as Larry Bates will suggest in his very important new book Beat The Bank, assemble it yourself (AIY), or you can look to the experts in risk management, but make sure that you are fully aware of the costs that you are having to pay.

What you need to be aware of is that any risk that we take may bring about potential swings in the short-term value of your investments (as current financial markets are creating at the moment). Those, however, will be more than offset in future years as your investments grow (and they will) as long as you can maximize the return per unit of risk that you take.

Most importantly, make a plan and stick to it. Exiting your plan because of some short-term volatility is a sure way to never achieve your goals.

And, as is always the case, past performance is no guarantee of future returns, but at High Rock we work darn hard to get the best possible risk-adjusted returns at a very modest cost over the long-term. A good way forward to achieving your wealth goals.

Remember Bitcoin?

About a year ago I wrote a blog entitled "Too Much Money Chasing Too Few Assets". At the time Bitcoin was breaking up through the $US 10,000 mark. About 3 weeks later it hit $US 20,000. Today it is testing the $US 5,000 level.

I wrote that blog after some conversations with clients and some prospective clients who so very much wanted to participate in the latest "get rich quick" scheme.

In my blog I wrote: "It will end when it ends and there will be plenty of tears and lost fortunes". I have not had many conversations about bitcoin lately, but I have had plenty of conversations about portfolio performance.

My business partner Paul Tepsich and I started High Rock Private Client as a way to grow our own money and be able to have full control over the risk factors (managing it with all our of our many years of collective experience) associated with investing with as little cost as possible. We also thought it would be  unique to offer this same opportunity to like-minded investors. Needless to say, unlike many advisors who are just selling funds and structured product to get paid a commission (and I sadly see this so very often), we own the exact same assets as our clients do (although it may be in different allocations in conjunction with various our goals, time horizons and risk tolerance levels).

When we are afraid of high and rising risk (as we were at this time last year, per my blog), we are going to be practicing what we preach: defense.

I was a goalie for 51 years before hanging up my pads (2 years ago), defense is built in to my DNA.

Chasing returns by buying expensive assets because they are high and rising in price is an emotional reaction driving a desire to participate and not get left behind no matter how short a period of time those returns might last.

2018 has been a classic example:

In January, a wave of "throw caution to the wind" buying enveloped the US and global stock markets. Huge volatility, the likes we had not seen since 2015 and early 2016 erupted in February and again in October, pretty much wiping out any gains and from a global scale pushed stocks to levels not seen since mid 2017.

Bond markets were re-priced lower as interest rates rose and balanced portfolios were left mostly in the red, a deeper, darker red for those who, unlike us defensive minded investors, were "fully-invested".

From that same late November 2017 blog: "The big problem, of course, is that when asset bubbles burst (and they will) all risk assets become more closely correlated. That means that selling of risk assets intensifies across the board: as assets get sold to pay for the loses on other assets".

Well my friends, bubbles are bursting and liquidity is drying up. With less liquidity, there is less money available to push prices higher and all the folks and corporations who have borrowed to invest need to pay down their debts because the cost of borrowing against falling asset prices has become a losing trade and they have to sell assets to do it.

This will (and may already be happening) transcend into the housing market too. Anecdotally, if you look around Toronto, I don't think I have ever seen more open houses in the month of November before. 

If you own risk assets, there is more selling to come, so prepare yourselves. If you have debt against these risk assets (leverage) pay it down as much as possible or get rid of it completely.

Paul and my portfolios (and all of High Rock's Private clients for that matter) are positioned defensively because that is how we believe it is most prudent to be as we near the end of the economic expansion cycle.

And Bitcoin? We never liked it and never owned it and refused to get caught up in the hype. We didn't get caught up in the January stock melt-up hype either. We use the hyped-up markets to sell into (especially when new, fully-invested clients jump on board) and raise our levels of cash equivalent holdings for future buying at lower price and value points, which we know will come eventually and which we shall patiently wait for.

We are in this for the long-term and will not be emotionally driven by short-term phenomena.

Make a plan and stick with it.

The Power Of Compounding And Your TFSA

If you have contributed the maximum allowable amounts to your TFSA (and you were born in 1991 or before), that would amount to $57,500 over the last 10 years (i.e. since 2009). On average, just $5,750 per year (although there were varying allowable maximum contribution limits for different years). If you were able to get a 4.5% average annual return (after fees) over this period, you could very well have have something that resembles $70-75,000 in value there. The future value of a $5,700 per year contribution over 10 years with a rate of 4.5% = $73,194.72.

As in the chart above, if you contribute the max (at the moment) $5,500 per year over the next 10 years and are able to get that 4.5% annual return, the future value jumps to $184,295.64.

20 years (2038) = $356,831.98

30 years (2048) = $624,775.64

And for you younger folks (and this is why you start doing this as soon as you possibly can):

40 Years (2058) = $1,040,883.95

50 Years (2068) = $1,687,087.43

If you were born in 1991 (or before) and have not thought about a TFSA, you can still get started with any part of the so far maximum allowable $57,500 and jump into the compounding fray. 

The numbers won't look quite as good as those above, but the future value of $57,500, with $5,500 per year ($458.33 per month) contributions at 4.5% per year is:

10 Years = $159,922.23

20 Years = $318,980.81

30 Years = $565,993.93

40 Years = $949,597.74

50 Years = $1,545,322.74

Parents, teachers, mentors it is a fantastic way to encourage your charges to build wealth. Wealth that will grow and compound without the imposition of any taxes, which is why the longer you have it in your TFSA, the greater the growth will be.

When we do our client Wealth Forecasts, the TFSA becomes the best growing account in the plan over time, for that very reason.

Make a plan, stick to the plan and away you go. 

Need help?

http://highrockcapital.ca/index.html

U.S. Mid-terms Out Of The Way

What's Next?

Global equity markets have clawed back from their October lows. We can expect to see some relief buying (upper gold circle on the above chart) in the near-term, which will be well received by investors who watched their portfolios take the big tumble. It could very well take us to the end of the year for those who use that time frame to mark their annual portfolio growth progress. The big equity portfolio managers will be doing their best to show something positive in what will end up being a pretty lackluster year.

The U.S. Federal Reserve will likely raise rates another 1/4% in December. This will once again reduce liquidity in the financial system and push debt service costs even higher,  further slowing the U.S. and global economy. So one should not get too comfortable with slightly better equity prices and prepare themselves for a rough first half of 2019 on that front (a re-test of buying support to the lower gold circle or even the long-term bull trend-line on the chart).

We at High Rock do our best to keep our personal politics in check for investing purposes (politically agnostic) so that we can take a less emotional perspective of the current economic environment. 

That being said, bond markets might now worry less about any further U.S. fiscal stimulus with the Democrats having control of the House of Representatives and doing their utmost to keep President Trump in check.

There is still an ever increasing deficit from the tax cuts to fund because tax receipts are not keeping up with spending outflows  despite the economic growth of the 2nd and 3rd quarters. The 4th quarter looks like it is going to come in somewhere between 2.5% - 3.0% annualized GDP growth (at the moment).

That will lower inflationary expectations and bond investors will likely demand less of a premium for longer-dated maturities, taking the yield curve back to a flatter position. The 2 year to 30 year spread differential has narrowed by 5 basis points (from .50% to .45%) already this morning.

This may spell some temporary relief for fully invested 60/40 balanced investors, but it is likely only temporary. Fully invested in equity portfolios are likely going to run into some turbulence again in the new year.

Cash or cash equivalent investments (and under-weight equity positions) are going to take some of the sting out of further equity market volatility in 2019 as will some broader diversification into other non-correlated asset classes.

At High Rock we specialize in Canadian High Yield Bonds (C$HY) and my business partner and colleague Paul Tepsich may well be one of Canada's foremost portfolio managers in this asset class. All of our High Rock Private Clients have some exposure to C$HY for purposes of diversity and it has been one of the best performing asset classes through 2018.

On a risk-adjusted return basis (return per unit of risk) it has been one of the top asset classes over the last 10 years and unlike government or corporate investment grade bonds has little if any correlation to interest rates:

Diversity (and until we get to the next economic cycle), a reduced exposure to equity markets and perhaps more cash equivalent assets in their place are going to save you some soul searching and nail biting and help you sleep better at night.

As always, past performance is not a guarantee of future returns. Although at High Rock we work darn hard to get our clients the best possible risk-adjusted returns over multiple years.

Managing Portfolios For The Long-Term

If  you want to lock in a risk-free return for the next year, you can buy a Government of Canada T-bill with a 2% yield.

In a taxable (non-registered) account, that return is income and will be taxed at your marginal rate. 

You also need to buy it with the least possible cost to you.

With inflation running at or about 2% (depending on how you consume and where you live, it may arguably be higher), you're money is not going to grow fast enough to keep up with your cost of living if you buy that t-bill (after fees and taxes).

If you want your money (after fees, taxes and inflation) to grow you are going to have to take risk.

The big question is, how much risk do you need to take?

The simple answer is: enough to grow your money faster than inflation, fees and taxes and to continue to afford yourself a cost of living that is in line with what you have come to expect.

Step 1: you need a long-term plan. You can do it yourself (DIY) or you can work with a professional. Bianca (High Rock's Certified Financial Planning professional) tells me that a stand alone financial plan will cost about $200 per hour. Depending on the complexity, this could take 3-6 hours to put together and be presented. Semi-annual updates may be another few hours per year (modifying and presenting).

For many DIYers the spreadsheets can get pretty complex when you have to factor in cost of living calculations (indexing) and taxes. Bianca has all the tools (and updated calculators) of her trade on hand to ensure ongoing accuracy.

Step 2: you need an asset allocation strategy: that combination of a balanced and globally diverse set of investments that make the best sense for you, maximizing returns and minimizing the risk needed to achieve those long-term growth goals. We call those risk-adjusted returns.

Step 3: you need execution: what is the best possible way to get this plan put to work at the least intrusive cost.

So many people have historically turned to banks to get there advice. The banks, on the other hand, know and expect you to turn to them. They are waiting for you and ready to make you pay significantly with all sorts of hidden fees and costs.

One of the best I've seen is where they give you a nice prime rate based mortgage (prime is at 3.95% now) and at the same time are thrilled to have you buy their GIC's or term deposits at 2%, garnering a very tidy 1.95% from you. We see it all the time.

Please read Larry Bates' Beat The Bank for some great insight. And if you are going down the DIY route, this is an invaluable tool.

I'll let Larry tell you all about mutual funds!

If you are a busy professional (no time) or not so comfortable with the intricacies of understanding the risk / return equation (there are many of us who go to school and write qualifying examinations to understand the complexities in it) try looking outside of the financial institution box: there are plenty of us that have all the protections that a bank can offer plus unlike a bank, we provide a legal fiduciary duty to our clients.

Check out Seek Advisor if you want to get a taste of the alternatives. There may just be a good fit in there that works for you and your family.

Make sure you understand the fees, both  upfront and hidden. The regulators are falling short of making this mandatory, so you have to ask the tough questions. At High Rock we will tell you upfront that our management fee is 1%. Our custodian, Raymond James Correspondent Services charges 0.15% for their back office services and the custody of your accounts) and the built-in or embedded (hidden) ETF fees (because we do use some ETF's for our models and portfolios) will probably work out to an additional 0.05% (give or take 0.03%) of your entire portfolio. So all in it is about a 1.2% fee. This includes the $200 per hour Wealth Forecast (financial plan) that Bianca so diligently prepares and monitors and reviews.

That should put us on par or even ahead of any robo service (because they will also have embedded fees and costs), and you get good, old fashioned, full client service (humans to communicate with).

For those who need to be assisted with "sticking to the plan" for the long-term, this may be invaluable, because after all, we are mere mortals and some of us who get "a little too close to the windshield",  as my High Rock partner Paul so aptly put it in our October Update video, sometimes need a reminder.

The point is, you need to get to retirement (or the place where your income is reduced enough so that you are in need of your investments to provide for you) and then you need to be able to live comfortably for the next 30 or 40 years (depending on your retirement), growing your money and staying ahead of the increases in the cost of living.

Some years, like this year and 2015, 2008, 2001, etc. may pop up in our faces to challenge our long-term planning. However, many more years like 2002-06, 2009-14, 2016-17, etc. will continue to provide great growth opportunities and far out-weigh the short-term negative years into the future. This will more than balance out growth and provide better than average returns over multiple year periods. It has been so in the past and it will be again. The clients who have been with us the longest get it. Tougher for the new ones to get comfortable with.

Need help with this?

Let me know.

scott@highrockcapital.ca