Investing Outlook for 2016: Cloudy with high volatility & increasing risks for negative returns

Over the past three weeks I have been trying to separate what is noise from the business media and what is reality. I am preparing for my investment club’s annual shareholders’ meeting. Facing a room full of financial advisors can be nerve racking. They expect my experience in option trading to produce positive returns regardless of market direction. My 2015 results will not disappoint them.

However, I found investment trends in 2015 to be very obvious but 2016 is going to be much more difficult. Last week I posted that world economic growth in 2016 is going to suck. World growth estimates came down on Thursday from 3.5% to 2.9%. Fourth quarter GDP growth estimates for the United States have been reduced to a range of 0% to 1.2%. Trying to find companies that can grow their revenue and profits in a slow growth environment will be challenging.

Why my 2016 crystal ball is cloudy

1. Most experts were wrong with their predictions on the price of oil in 2015. Their current prediction is for low oil prices for the first half of 2016 and a rebound to the $50.00 range later in the year. If they are wrong again, many oil producers will default on their high yield debt, leading to bankruptcies that could cause panic in the stock markets.
2. The Federal Reserve has been communicating 4 interest rate hikes but Wall Street experts believe that only 1 or 2 hikes will actually happen. If they are wrong, the U.S. dollar will increase in value causing lower profits for U.S. multi-national corporations. Plus higher interest rates will reduce share buybacks which isn’t very positive for stocks prices.
3. China is struggling to manage their economy. Economic growth in China, the second largest economy, is questionable at best. China buys Brent crude oil which usually trades higher than WTI. The price spread has been narrowing confirming weak oil demand and slower economic growth. (Brent $33.34, WTI $32.92)
4. A stock is considered to be in a bear market when it trades 20% or more below its 52 week high. More than half the stocks within the S&P 500 are in a bear market. Current price to earnings ratios are high in comparison to lower profit growth.
5. No Santa Claus rally and January started with five straight down days in spite of a positive jobs report. (Scary)
6. The Canadian stock market is down 20% from its Sept 2014 high which is already in bear market territory. Many fund managers believe that a rebound in oil could cause the Canadian market to outperform the U.S. One young fund manager recently stated that his energy fund is 100% invested in the oil patch. (Foolish?)

Here is a small portion of what I am going to say at our shareholders meeting

I took some profits leading up to the Dec 16, Fed meeting and also did some tax lost selling. Our current portfolio contains 55% cash, 5% in Canadian stocks and 40% in U.S. stocks. I expect market volatility to increase during 2016 making option trading more profitable. It will also make buying put options for downward protection more expensive.

The three biggest unknowns are the future price of oil, the number of interest rate hikes by the Fed and GDP growth in the U.S. and China. I believe that the Canadian stock market is pricing in a recession in Canada. If crude oil doesn’t rebound in the second half of 2016, the Canadian dollar could fall further and we should consider moving more of our Canada cash to U.S. dollars. I will also ask them for their views on the current market turmoil and for some of their recommendations to clients.

Stay tuned for my next post which will hopefully have some investment ideas.

I am very sure that the roller coaster ride that started in 2015 will continue in 2016.

 

 

 

Don’t Ask for Financial Advice, I am on Vacation

Although I am no longer working as a financial advisor, sometimes I just can’t get away from being asked financial questions. I just got back from my annual golfing trip to Orlando. The conversations, over a few drinks, are usually about our golf game. However, some of my golfing buddies just have to ask for my opinion regarding their investing ideas.

Here are just a few examples:

Question # 1 – “I saw advertised on T.V.  an investment opportunity in real estate where your money is locked in for 3 years but they pay 8% interest on your money. What do you think”?

Answer: “I would have to look at all the financial terms and conditions to give an accurate opinion. However, I have come across private funded rental real estate in the past. Developers can only get bank financing based on long-term lease agreements which are signed before construction begins. Your money goes to build additional units that the developer hopes to lease out within three years. It usually sounds like a safe investment but there are no guarantees that you will get your money back or that the rate of interest will not change.”

Question # 2 – “I own shares of Crescent Point (A Canadian oil & gas producer) and they are trading 40% below my purchase price. Don’t you think that the price of oil will go back up”?

Answer: “No, there are 3 billion barrels of oil world-wide sitting in storage tanks and in oil tankers hoping that the price will go up. At $40.00 a barrel, Crescent Point is losing money. They have stop their dividend re-investment plan and are slashing costs, budgets and streamlining operations in order to cope with low oil prices. If they are not successful, they will soon be force to cut their dividend and the stock will fall even further in price.”

Question # 3 – “I have $10,000 in a play money investment account. I was thinking about buying shares in Bombardier (A Canadian manufacturer of planes & trains) because the share value is so low and the shares could bounce back up. What do you think”?

Answer: “Not a good investment, just because the share price is only $1.28 doesn’t mean that it is a bargain. Bombardier has cost overruns on its “C Series” planes and can’t deliver them on time. The city of Toronto has an order for new subway cars that should have been delivered over a year ago. It is a poorly run family business with dual class shares so you have no say in the matter. The debt level is so high that there would only be $.03 a share left over if the company sold all its assets to pay off creditors.”

Last year I was asked about IBM. I told my friend that he should convince his wife who just retired from the company to sell her shares. The IBM shares were trading around $185.00 U.S. at that time.

This year I asked him “Did you convince your wife to sell IBM”?

He answered “No, she still owns them, she is emotionally attached to them and she is worried about paying tax”.

I responded “Not to worry, the stock is down to $132.00 and it won’t be long before the stock falls back down to her original purchase price eliminating any tax worries.”

Another friend of mine suggested last year, that I should buy some natural gas stocks because gas prices tend to go up in the winter time. He owned some shares in Encana at around $21.00. I told him that there was an over supply of natural gas due to fracking and that I was avoiding natural  gas stocks.

This year I asked him “How did you make out with Encana, did you have a stop loss order on it’?

He answered ” No, I still own it!”

I responded “Really, that’s too bad!”

(the stock is currently trading at just under $11.00)

Investing Advice

• Do your homework on investment ideas that you see on T.V.
• Oversupply of oil takes a long time to rebalance
• The low price of a stock has no bearing on its true value
• Don’t let tax concerns stop you from taking a profit
• Admit you made a mistake and take the loss

I rarely give out stock picks to friends because no matter how many good quality picks you give them, they will always remind you of the one that was a poor performer. The average investor doesn’t realize that even the best stock pickers admit that they are lucky to be right 60% of the time. Financial success comes from letting your winners run and cutting your losses early.

In my experience, most people tend to have an aversion to losses. In fact, most studies in human behaviour suggest that losses are twice as powerful, psychologically, than gains.

Watch out for alligators when golfing in Orlando!

Rebooting Year-end Tax Planning Tips

When I was a financial advisor, I use to contact my clients with some year-end tax saving ideas. As a writer of a financial blog, I decided to remind readers that now is a good time to review your tax situation. Holiday season is just around the corner, you are going to be busy visiting with family & friends and Christmas shopping.

You will be glad during tax filing season that you planned ahead! You could reduce your tax bill or generate a bigger tax refund. I updated a similar post that I wrote last November and added some new tax saving tips.

Tip 1 – Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Do you need new eyeglasses or hearing aids then buy them now. Planning a winter vacation that requires medical shots, get them ahead of time.

Tip 2 – Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and the full amount is tax-deductible creating a bigger tax deduction.

Tip 3 – Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax-deductible retirement account could generate a bigger tax saving. (Plus stock market returns have been known to be higher from November to April) If you are retired and your income is lower than last year, consider withdrawing a little extra from your retirement account and put it into a tax-free account.

Tip 4 – Have you sold any investments in 2015 that will generate a taxable capital gain?  Do some tax loss selling of investments that are underwater to offset the capital gains. In Canada, a capital gain loss can be carried back three taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5 – Postpone selling your investment winners in non-registered accounts until January to avoid paying tax in April. If you have losses, consider selling some winners and buy them back again to increase your cost base.

Tip 6 – Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket. For example, in Canada you can contribute to your spouses’ retirement fund and claim the deduction.

Tip 7 – Top up education savings plans for your children or grandchildren to ensure your plan gets any eligible government grants. (Canadian grants stop the year in which the child turns 18)

Tip 8 – Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 9 – Check to see if there are any changes to tax laws that could affect your tax return for 2015 & 2016. There could be some new tax deductions or some deductions that could be eliminated. (In Canada, the Family Tax Cut allows families with children to split their incomes for a tax credit maxing out at $2,000.00)

Tip 10 – Small business owners should go over their account receivables and make a list of potential bad debts. Consider writing off any bad debts that are more than 120 days overdue before tax season ends.

According to the Fraser Institute, tax freedom day in Canada was June 10 this year. The average Canadian family with two or more people will pay 43.7% of their annual income in taxes. The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

Do you have any year-end tax planning tips?

 

 

 

Does Your Debt Die With You?

My daughter asked me this question while having dinner at her house.  It started with me complaining about how some of my boomer friends were living beyond their means and had mountains of debt. I had to reassure her that we were not in that situation. (It is not uncommon that your family dinner conversations included some financial topics)

I explained that she and her brother had nothing to worry about. Children are not responsible for any debts belonging to their parents.

Generally, the estate pays off debts, as long as there’s enough money in an estate to pay them all off. Any remaining money goes to beneficiaries. There is an order to how debts must be repaid. Funeral expenses, income & estate taxes and secured debts are the top. Unsecured debts, such as credit cards, lines of credit are near the bottom. If the estate does not have enough money to pay back all the debt, creditors are out of luck.

Remember that jewelry, antiques and other valuables must all be added to the total value of the estate. You might be forced to sell some of them in order to pay back creditors. Very important, the executor of the will could be liable if he or she pays money out to the beneficiaries from the estate before all the debts are settled, creditors could make a claim against the executor personally.

Creditors could also go after an individual’s retirement account and proceeds from a life insurance policy if no person is named as beneficiary. Those funds would automatically be included into the total value of the estate. However, in Canada, retirement accounts can to transferred tax-free to the surviving spouse.

Joint ownership or loans that have been co-signed are different. You will be responsible to pay them back. You don’t inherit your parents’ or your children’s debts unless you guaranteed them.

It is very important for young people to check their own credit report periodically to make sure you are not still holding debt for someone who isn’t in your life anymore. Credit cards that you have co-signed years back may still be active and you could be also on the hook for apartment leases even if you moved out.

Estate laws vary depending upon where you live and can be very complex. Get some good legal advice, talk to a tax specialist and pick a knowledgeable executor. You can’t take it with you! However, avoid giving it to the tax man and leave something to your love ones instead.

 

 

 

Write a Personal Financial Plan in 7 Easy Steps

Financial plans are written, organized strategies for maintaining financial health and accomplishing financial goals. It is centered on your unique circumstances, desires and objectives. Writing a plan is easy, making some personal sacrifices and having the discipline to stick to your plan is the hard part.

STEP ONE – Define your goals – both short-term & long-term

Some common short-term goals are:

• Debt reduction/elimination
• Vacation planning
• Planning a wedding
• Home ownership – Saving for a down payment
• Family planning
• Post graduate degree
• Job retraining programs

The most common long-term goals are:

• Saving for your children’s education
• Paying off your mortgage
• Saving for retirement

 

Step Two – Organize your financial records

Create a filing system of your tax returns, bank account statements, insurance policy information, contracts, receipts, wills, deeds, titles, bills, investment accounts statements, retirement account statements, pay stubs, employee benefits statements, mortgages and any other type of document that is related to your financial life.

Step Three – Create a preliminary budget

Your budget is a starting point for determining how you will reach your financial goals, as it allows you to identify and evaluate your spending habits. Write out all of your current monthly expenses, as well as your current monthly income. Separate your budget into three categories.

What you need; food, shelter, utilities, clothing, transportation etc. What you want; mobile devices, fast foods & dining out, gym membership, beauty products, holidays & gifts, hobbies & sports etc. Savings & debt payments; credit cards, student loans, lines of credit, car payments and mortgage.

Step Four – Analyze your spending habits

Take a good look at where your hard-earned money goes. Are there any easy places that you can cut some spending? Are you willing to sacrifice your morning coffee at Starbucks or your gym membership? How about hosting a pot luck dinner instead of eating out with friends? You alone can determine between what you really need and what you want.

Try to allocate 20% of your after tax income to the saving & debt payments portion of your budget. A bare minimum of 10% in savings if you graduated with a large student debt load. If not, then you may not have enough income, have a spending problem or have too much debt.

Step Five – Set a time frame and finalize the budget

Separate your goals into different time frames, one year, five years and longer. Take a look at your savings, determine how much you need to save each month in order to achieve each goal. (Use on-line calculators for savings goals, mortgage and debt repayments)

Step Six – Devise an income strategy that will help reach your goals

Savings accounts are fine for short-term goals. Medium to long-term goals may require extra income. You could consider upgrading your skills to qualify for a higher paying job. Take on a temporary part-time job or start your own small business. You could also invest your savings to generate additional income in the form of interest, dividends and capital gains.

Step Seven – Re-evaluate your plan as necessary

It’s helpful to take a look at your plan every few months to ensure you’re on track. Is the goal still realistic or attainable? If not, what adjustments can you make?

 

Helpful Tips

1. Avoid pitfalls – Peer pressure and “Keeping up with the Jones,” make it difficult to stay on track. Comparing your life style to your family & friends is a big mistake. A common expression used for people who spend money that they don’t have is “They have champagne tastes on a beer budget.”
2. Stay focused – Keeping your focus on long-term goals can be difficult. The benefits are so far in the future, it’s easy to take a detour like putting off saving for your child’s education. It is much more fun to take the whole family to Disneyland.
3. Seek professional help – It is worth paying a lawyer for legal advice regarding wills, power of attorneys and for buying real estate. For tax saving strategies, an accountant is your best bet in navigating through a very complicated tax system. A good, low-cost financial advisor is worthwhile only if you have investable assets in excess of $150,000.
4. Keep score – Make out a net worth statement every year as a way to measure your success. Paying down debt may not be an exciting goal but seeing that debt go down each year and your net worth go up, may keep you motived.
5. Celebrate your achievements – Select an indulgence to reward yourself for achieving a goal. I wouldn’t recommend a mortgage burning party. Some friends or relatives may feel uncomfortable or inadequate about their own financial situation.

Bank of Mom & Dad, Cutting the Purse Strings

It’s natural for parents to want to help and support their children. But should that help continue well into adulthood? By helping too much, parents run the risk of imperiling their own financial future and creating dependence. The reality is that you are not doing the adult kids any favors  by always bailing them out.

The Great Recession rewrote some of the rules of financial independence for many young adults. With jobs being scarce, student debt soaring and high household debt, it wasn’t uncommon for grown children to take refuge in their childhood homes.

Those were unusual circumstances when even hardworking children found themselves in financial straits. It is okay to help them if they are financially responsible but have fallen on hard times. However, an “open wallet” policy is dangerous for parents as well as children. Always coming to their rescue can jeopardize both your child’s drive and your retirement security.

Tough Love: Teaching Financial Responsibility

The best defense against dependent children is increasing financial responsibility as children grow. You need to start the process when your children are young. Counting on the school system or waiting until after they graduate college can be a costly mistake.

I strongly recommend pushing your young children to get part-time jobs. If they are driving the family car, make them pay for some gas or a portion of the car insurance. Paying for some or all of their cell phone bill is another way to teach financial responsibility. Avoid always acting as their personal taxi service, make them take public transportation once in a while.

My son never wanted to use the family van when going out with his friends while living at home. Going away to university, he spent two years taking public transportation, that experience really changed his attitude. He was so grateful that I gave him our 10-year-old van instead of trading it in.

It’s okay to say no! My eight year old daughter asked for horseback riding lessons. I honestly didn’t take her request seriously. I said that riding lessons are expensive and we didn’t have the money right now. She came back with the job section of our local newspaper. She pointed to an ad that was looking for delivery people. “Is this enough money to pay for riding lessons”? It wasn’t but we said yes to riding if she was willing to give us half her earnings from the paper route. (We invested her money and gave it back when she graduated from university).

The Right Kind of Help

1. If your children need a car to get to work, consider giving them an old family car that is still reliable. A few repair bills can teach them some added responsibility and give them an incentive to save for a new car.
2. If your children are paying a high rate of non-deductible interest on their student loans, loaning them money at a lower rate of interest can be helpful. Put all the details of the loan in writing and make sure that your children make regular monthly payments to you.
3. Some assistance with a down payment for a house is okay as long as your children are willing to disclose their financial situation. Bank of Mom & Dad should ask the same questions as your local banker. Are they paying off their credit card balances every month? What are their fixed monthly debt payments? Add the estimated mortgage payments, property taxes and heating costs to those payments, if it exceed 40% of their gross income then they probably can’t afford to buy the house.
4. Help your children save for retirement. Deposit money directly into a retirement account that generates a tax refund. The refund gives them a little extra cash but the compounding effect from investing the money early can increase the chances of a successful retirement.
5. Some children will never be financially responsible, skip a generation and open an education plan for your grandchildren.

As a financial advisor, I encountered financial mistakes made by some of my wealthier clients. For example; a client  gave his newlywed daughter and son-in-law enough money for the entire down payment for a house.  Three years later, they got divorced and the ex-husband walked away with half the proceeds from selling the house including half of the Dad’s down payment.

As a parent, you need to protect yourself, get some legal advice when transferring large sums of money.

Gifts vs. Loans

For U.S. citizens there is a gift tax on sums greater than $14,000 or $28,000 per couple. In Canada, there isn’t a gift tax on money given to adult children. However, transferring investments or property to your children can trigger capital gains tax which must be claim on your tax return. Be extra careful transferring investments to a minor, the parent incurs tax on any interest or dividend income from those investments until the minor turns eighteen.

Be aware that the tax man requires a minimum interest rate charge to loans made to family members. The interest rate varies from year to year. The current rate for Canadian families is only 1% with no time restriction regarding payback.

However, Internal Revenue Service rules are different, in March the Applicable Federal Rate was 0.40 percent for loans up to three years, 1.47 percent for loans of three to nine years and 2.19 percent for loans longer than that. If your children don’t pay it back, it becomes a gift.

Keep in mind that a child in their 30s or 40s has lots of options for generating income; a retiree does not.

Money Saving Tip: Tax Preparation Software

 

 

 

I REALLY HATE over paying INCOME TAXES! For years I refused to spend money to help the government collect My Tax Dollars. In principal, the tax preparation software should be tax-deductible. (NOT in CANADA) I finally realized, trying to punish the government with having to sort through my mounds of paperwork was like “Cutting My Nose off to Spite My Face.” I was punishing myself more by spending hours and hours filing out tax schedules and forms. Imagine that I used to file seven paper returns for my immediate family plus help my friends with their returns. That is a lot of paperwork.

Accountants and tax preparers can charge exorbitant fees. Most people find filing their own tax returns very intimidating! The information that you need is on the CRA or IRA web sites, plus tax preparation software is almost idiot proof. Most software have a step by step instruction option that is really simple. All you have to do is answer questions and put a check mark in the box on all sources of income and tax-deductible items that apply to you. The step by step method also allows for filing joint returns.

Advantages 

• It  is nearly impossible to miss a tax deduction, just slowly read each question
• It offers tax saving tips, especially good for joint returns
• It makes you aware of deductions that you may not have known were available
• it even allows you to make corrections
• Helps tax planning for future returns
• Keeps track of unused deductions to be carried forward to future years, like capital gains losses
• Allows you to set up direct deposit for your tax refund, you could get a refund in 10 days
• Gives you the option to file on-line or print a paper return for mailing.

Disadvantages

• May not be worth the cost for low-income individuals or for going only one simple tax return

Just remember that even if you use a professional to file your business or personal return, you are still responsible for any filing mistakes. You are liable for all penalties and taxes owed.

A hard lesson that I learned about accountants:

Would you be surprised to learn that I fired my first accountant? He used to comply my business income statements and file my corporate income tax return. He failed to advise me on some tax saving strategies for my company and for me personally. The next two accountants that I used were bombarded with tax saving questions almost every time we got together. Over time, the list of questions got smaller but my tax savings got larger! If you don’t ask, accountants tend not to tell!

Disclaimer: Please do your own research on tax preparation software.

 

 

A recent article from FORBES:

FBI Investigates Tax Fraud Reports As TurboTax Denies It’s A Target

“As concerns about stolen data and tax identity fraud continue to mount, it’s clear that this isn’t an issue restricted to Minnesota. Or Utah. Or Connecticut. With that in mind, it’s no surprise that the Federal Bureau of Investigation (FBI) has reportedly opened an investigation into a potential computer data breach related to fraudulent tax returns filed with TurboTax software.”

8 Yearend Tax Planning Tips

With only _______ shopping days before Christmas and you want me to read a blog post about tax planning?   Sounds crazy, but not everyone celebrates Christmas, almost everyone pays taxes. You could be glad in April because tax planning now could generate a tax refund. (You could  even pay for next year’s Christmas presents.)

Tip 1

Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax deductible retirement account could generate a bigger tax saving.

Tip 2

Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Why wait until next year if you need new eyeglasses, buy them now. Planning a winter vacation that requires medical shots, get them now.

Tip 3

Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and they get a bigger tax deduction.

Tip 4

Have you sold any investments in 2014 that will generate a capital gain? Consider doing some tax loss selling of investments that are underwater to offset the capital gains. A capital gain loss can be carried back 3 taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5

Postpone selling your investment winners in non-registered accounts until Jan to avoid paying tax in April.

Tip 6

Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket.

Tip 7

Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 8

Check to see if there are any changes to tax laws that could affect your tax return for 2014 & 2015. There could be some new tax deductions or some loss deductions.( in Canada, a safe deposit box is no longer tax-deductible)

The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.