Capital gains as part of the basics of investing

understanding capital gains

When it comes to investing, some believe that learning the complexities of the market allows for greater success. However, often, that doesn’t have to be the case. In fact, the simpler one can make investing, the better it can be understood and put to good use. Capital gains is a good example.

Indeed, capital gains is a concept that some investors simply take for granted. But you might be surprised at how misinformed some people may be on the topic. For example, here in Canada, one often hears about the 50-percent number for capital-gains taxation.

What gets taxed, and what doesn’t

Believe it or not, some think this means that capital gains are taxed at a rate of 50 percent. That’s why there’s often an outcry at the 50-percent number, because it’s thought that half of the profits are taken away. Of course, this is not the case.

How capital-gains taxation actually works in Canada is that half of the gains are subject to being taxed — within your personal income-tax bracket.

Let’s use a quick example. Let’s say you buy an investment property for $1 million. Five years later, you sell it for $1.5 million. That’s a capital gain of $500,000, correct? In terms of tax, you don’t pay $250,000, or 50-percent of your capital gains. Instead you take 50-percent of the capital gain, which is $250,000, and apply your tax bracket to that amount.

The difference it makes

So, in Ontario, if you’re in the highest tax bracket of 53.53 percent, you would pay a capital-gains tax of $133,825, which is 58 percent less than what many people think, and the tax savings could be larger if you’re in a lower income bracket or can use capital losses to offset the gains.

Some of this may sound simple. But, if you don’t understand some of the basics in investing, your foundation for success is not as strong as it should be.


The investment school of hard knocks

investment millennials

There has been a lot of talk about millennials over the past number of years. And, clearly, the age cohort tends to get characterized by a certain type of stereotype: millennials are spoiled, they don’t know what life is really like, previous generations have had it tougher, etc. However, when it comes to investing, the stereotype, even if exaggerated, might serve as a teaching moment.

The need for life lessons

Specifically, according to David Lafferty, senior vice president of Natixis Investment Mangers, and as reported by CNBC, the experience millennials mostly have of investing involves the last number of years, and this period has essentially been a bull market. As a result, Lafferty believes that such investors have never experienced the inevitable bear markets that happen over time and, consequently, don’t get to experience first-hand what risk is really like.

Think about it for a moment. It’s one thing to say all the right things when it comes to investing: that you have to think about the long-term, and ups and downs will always happen. But, if you’ve never really experienced a serious downturn in the markets, does the lesson really stick?

The human touch

And, according to the same article, what’s adding to the potential problem are automated investing services, or so-called robo-advisors, that make automatic decisions for investors, including millennials. While such services certainly make investing easier, in some ways they miss the point of investing entirely.

In order to become a good investor, one actually has to learn how to invest, instead allowing others, or other things, to do it for you. That’s not to say that people shouldn’t hire investment firms, or deploy robo-advisors under the right circumstances. But even an automated solution needs human wisdom behind it. So, the use of any help in investing should also come with personal observations and judgement.

That’s why living through investment downturns, on top of any real-world investing experience you can get, can provide some real-life learning to develop the long-term outlook needed to meet your financial objectives.


Why alternative markets thrive

alternative investing

There’s an old saying: the road to hell is paved with good intentions. It’s a harsh statement, but it does reflect the fact the results of our actions aren’t always as intended. There’s perhaps no better example of that than in the financial markets.

Recently, Benjamin Tal, who is deputy chief economist with CIBC World Markets, stated in a paper he wrote that recent restrictions in Canada’s mortgage lending industry — specifically, the B-20 mortgage stress test —  has resulted in unintended consequences, such as the rise of the alternative lending market. This echoes other warnings from other sources that the stress test is squeezing Canada’s mortgage and housing sectors.

Addressing supply and demand

Let’s take a step back to assess the situation. Canada has had an alternative mortgage lending sector for quite some time. It was established decades ago to try and increase private investing in mortgages. Yet, even before the current stress tests, this market has been on the rise. Why? Because, it could be argued, the traditional lending practices of the banks have been somewhat restrictive.

Now, let’s turn to the investing sector, which has followed a somewhat similar path to the mortgage sector. Traditionally, most people who wanted to invest did so through the public markets, such as stock markets, investing in traditional securities, such as stocks and bonds, that come with strict disclosure regulations, such as a prospectus.

The freedom to grow

However, this model was not satisfactory to a growing number of investors that wanted to seek higher returns than found in these traditional public markets. Hence, the rise of alternative and private investing in which the regulations and disclosure requirements are relaxed under certain conditions. This meant that investors who wanted to take greater responsibility over their portfolios could do so in order to meet more demanding investment objectives.

So, is there a lesson in all of this? Yes. The lesson is that the alternative markets, whether in mortgages or investing, exist for a reason. They thrive when governments, banks and regulators don’t provide the kind of room for growth and investment that the free markets allow for.


Do-it-yourself investing?

investment planning

The world of investing has certainly changed over the years, especially when it comes to access and culture. There used to be a time when people of a certain wealth with a certain background would have stockbrokers to help them manage their investment assets. The idea of, say, a factory worker or a plumber having an investment portfolio would have seemed strange back then.

But times have changed, haven’t they? Or have they? There certainly has developed over the years a greater amount of access to investing with the public at large. From discount brokerages to do-it-yourself online investing, the opportunities for everyone to invest on their own have never been greater.

Doubts about investing

However, according to a recent survey conducted by TD, Canadians in general are still very anxious about doing investing on their own, and are lacking in the confidence and knowledge needed to do so.

Specifically, one in three surveyed say they don’t know the basics of investing,  almost 40 percent of people not confident in investing never seek out resources to learn about investing, but 65 percent said they’d like to be able to invest for retirement, 36 percent want to purchase a new home, and 23 percent want to save for an education.

So, what does this information tell us? Well, it tells us that people want to use investing for a lot of good purposes, but they’re just not sure of how to go about doing it. So, how does this gap get addressed?

Going beyond yourself

The first solution is that people should always try educate themselves about finance and investments. There is no shortage of resources on that front. It’s just a matter of having some confidence to take that first step.

However, as much as personal knowledge and investment is important, let’s face it, not everyone can be an investment expert, although they should still be able to benefit from investing. As a result, potential investors shouldn’t be afraid to seek professional investment help, whether it’s in the form of an advisor, planner, counselor — you name it. Combining your own learning with that of a trained professional can often be a formula for long-term investing success.


Women and investing

investing gender gap

One of the basic truths about investing these days is that it has very much changed over the years, in a number of ways. It is open more to the public, which accounts for the growth of discount brokerages. The amount of information available is endless, thanks in part to the digital age and the internet. And the types of investments one can make has grown in scope, thus the growth of alternative and private investing.

However, as Hilary Osborne of the Guardian points out, one surprising area where perhaps there hasn’t been as much change as expected is in women doing the investing. If you think about all the ways in which women have broken through traditional barriers, which includes two female Muslims being elected to the U.S. Congress last year, the fact that women have not embraced investing as much as men is something that has gone largely unnoticed.

A world of opportunity

And, when something has gone unnoticed in the world of investing, it means opportunity. It means reaching out in ways where everyone possible can benefit from the advantages of investing, including women, which also means, to begin with, we need to understand why women aren’t investing as much as men, and how that gap might be addressed.

First, there is the ever-present wage gap between men and women, which might be a basic barrier to women in the investing world. They basically don’t have as much money to invest with as men. However, it’s also not 1950 anymore. Women are far more independent than they every have been, which means they have more discretion over their own financial decisions.

Winning hearts and minds

Which brings us to the second possible barrier for women and investing, and which Osborne points to in her article, which is that women tend to have a different mindset than men when it comes to what to do with money. The old stereotype appears to be holding, which is that women tend to save, while men tend to invest.

So, what can be done to change such mindsets? Frankly, reminding everyone, including women, about the advantages of investing, and how to manage risk, is probably the best approach available. Anyone looking at the history of investing knows that returns keep going up while risk is managed successfully. This isn’t a secret formula of success. It’s a basic roadmap that everyone can use to reach their investment objectives, including women.


Seeking global investment opportunities

investing beyond Canada

In today’s world of investing it may seem strange to keep emphasizing the need to have a global outlook, but as Kevin Greenard writes in the Times Colonist, there’s a reason why Canadians have often stayed at home when it comes to investing, and breaking out of that mould can take some time, and education.

Specifically, before 2005, Canadians were restricted to having no more than 30 percent of their registered accounts in foreign holdings. After 2005, all restrictions were dropped and Canadians were allowed to have 100 percent of such holdings in foreign countries. Yet, sometimes old habits are hard to break, but they are worth it, and Greenard uses the Canada Pension Plan (CPP) as an example.

If the Canadian government does it….

In 1999, 100 percent of the CPP’s assets were in Canada. In 2006, it was only 64 percent, and, in 2018, that number has gone all the way down to 15.1 percent. The greatest source of foreign investment for the CPP was in the United States, followed by Asia and Europe.

So, what should this tell you? It should tell you that, if one of the country’s most important portfolios, which invests for the benefit of Canadian pensioners, believes it’s necessary to invest outside of Canada in order to seek satisfactory returns, then maybe the rest of us should start thinking the same.

There are so many reasons why investors should think globally when seeking opportunities. For one, and it’s something we’ve stressed on these pages for some time, investing in different places is a form of diversification. For example, global factors impact emerging markets differently than they do developed markets, so investing in each helps to diversify and protect a portfolio, doesn’t it.

Diversification and more

Greenard provides other reasons why investing globally, especially for Canadians, is a good idea. For one thing, the list of good investment opportunities, such as good companies, is limited in Canada. Why not expand that list by looking elsewhere? Also, while Canada may be strong in certain sectors, such as resources, it may not be very strong in others. Seek those other sectors in other places.

Indeed, the list of reasons to expand your portfolio globally is far too long to list here, but sometimes it’s just a matter of breaking old habits and going beyond the familiar in order to achieve the kinds of  returns that meet your investment objectives.


You’re never too young to invest

baby boomer children investing

When you think of a typical investor, what kind of image comes to mind? Do you think of a wealthy elderly gentleman smoking a pipe, reading the financial section, and calling his stock broker for the latest quotes?

This may well have been typical of the kind of person who would have been a consistent investor a few decades ago, but, as with all things, times change, and that certainly holds true in the world of investing. In fact, according to a recent study conducted by OnePoll for Ally Financial, it’s millennials that are investing in surprisingly high numbers.

The maybe-not-so-soft generation

First, let’s briefly establish what a millennial is and why their views towards investing might be important. Millennials are people who were born in the 1980s or 90s and became adults as the new millennium approached. That’s why they’re called millennials. Amazing, right?

But when millennials were born and grew up isn’t as important as the values they’re associated with. Generally speaking, millennials have grown up in an age of technology, and the amount of hardship millennials have had to endure is seen as being less than in previous generations, including the baby boomers that are often the parents of millennials.

A formula for successful investing

So, when the poll came out and found that nearly seven in 10 millennials are investing, it means something. It means that maybe millennials aren’t as spoiled or as soft as the popular image has led some of us to believe. It also means that you’re never too young to invest — literally.

Among the other findings of the poll are that 85% of the millennials surveyed have made money, with the average net being about $2,500. The right age to invest seems to be 28, with an annual salary of $35,000 seen as a minimum, and a savings amount of $3,560 seen as a requirement for entry into the ever-increasing world of investing.


Bonds as alternative investments

alternative investing bonds

The terms bonds and alternative assets don’t always come together, do they. There are a number of reasons for this. Most notably, when investors turn to the alternative markets, they often do so seeking higher returns, and these higher returns are often associated with more glamourous or high-profile types of assets, such as hedge funds, venture capital, corporate finance — you name it.

However, as a recent CNBC article points out, bonds can in fact be a very rewarding aspect of alternative investing. But, as has already been suggested, the problem is that too few people really know anything about them, or about the value they bring to an investment portfolio, especially one unafraid of the alternative markets.

As always, it’s about the returns

As the article specifies, the allure of non-traditional bonds is that they can offer returns that are greater than those of, you guessed it, traditional bonds. Indeed, this reasoning is why the alternative markets exist in the first place, isn’t it. People are seeking greater returns than those offered by the traditional markets. It’s that simple.

When it comes to non-traditional bonds, the challenge isn’t only that investors aren’t aware of them, but the fund managers and experts are also not as aware of them as they should be. What does this mean to the forward-seeking investor? It should mean opportunity. When others have yet to see the value in an investment opportunity, it’s like fishing where the fish are, while others are fishing elsewhere.

Hot sectors

So, are there specific areas of investing in non-traditional bonds that are particularly appealing today? Yes. According to the CNBC article, current sectors that are attracting growth in non-traditional bonds include the environment (green bonds), foreign currency, and emerging markets, as well as state municipal bonds reaping the rewards of tobacco court settlements.

If nothing else, the area of alternative/non-traditional bonds should serve as a further reminder that opportunity awaits in the world of alternative investing as long as there’s a match between investors looking for the greener pastures of higher returns, and investment opportunities that specifically provide that in ways that constantly evolve over time.


Seeking investment insight

warren buffett

There is no shortage of proposed insight when it comes to investment success. Some people think it comes from knowing people. Others think it comes from hard work. Although those things are true, in and of themselves, they don’t constitute a formula for investing. You need more. Let’s take a closer look at what you should seek to reach your investment goals.

Larry Sarbit is CEO and CIO of Winnipeg-based Sarbit Advisory Services and is the sub-advisor on three funds for IA Clarington. In an article he has written for the Financial Post, Sarbit provides some insight into what constitutes a formula for investment success, and he does so by plucking some established wisdom from one of the most famous investors of all time, Warren Buffett.

Investing is like fishing

Well, actually, Sarbit’s first insight comes directly from Charlie Munger, vice chairman of the conglomerate headed by Warren Buffett, Berkshire Hathaway. Recently, Munger said that the first rule of fishing is to go where the fish are and that the second rule of fishing is to follow rule number one.

According to Sarbit, Munger used the example of China to make his point. Specifically, Munger spoke of a successful Chinese investor, Li Lu, who did very well by investing in China, which, metaphorically speaking, is where all the fishes are, from an investment standpoint. In other words, you need to find investments in places that haven’t been depleted of fish.

The circle of competence

Which brings us to another bit of Warren Buffet Wisdom that Sarbit points to, which is to stay within one’s own circle of competence, and Sarbit again used China as an example. He says he would never venture alone in China as an investor because he doesn’t know the language, the culture, or the type of governance to expect. Instead, Sarbit prefers to stay in places he’s familiar with, or partner with people abroad who actually know the domestic landscape.

In other words, Buffett, Munger and Sarbit are all preaching what we’ve been preaching here, too, which is to invest in places where other people aren’t, and to do so with either your own personal knowledge, or that of people you can partner with for long-term investment success.


A truly long-term outlook

long-term economic outlook

There is never a shortage of short-term economic an investment prognostication to be found in the popular media. In case you haven’t heard, there’s eventually going to be a recession, never mind that recessions happen from time to time.

Of course, we’ve talked about such short-term prognostications here on these pages. If you went just by what you here in the popular media, including in the financial pages, you’d think we not only would have hit a recession by now, but maybe even a depression. That’s how bad things seem to get, if you look at the short-term.

Not day-to-day, or even a year

That’s why smart investors don’t just look at the short-term and, in fact, successful investors have to look at the bigger picture, too. However, even here, much of the popular media has a focus on yearly outlooks. If you were to do a Google search right now, almost all the investment and economic outlooks are for the year 2019.

But, as a forward-looking investor, you have to look even beyond 2019. What about 2020 and beyond? If you’re going to meet your investment objectives, you have to see that far ahead and then some.

So, if you start looking that far, you get to find information that others aren’t looking at. For example, Scotiabank provides a long-term economic outlook for the Canadian and U.S. economies, and it covers the period from 2018 to 2023. Its findings shed an interesting light on what the future might hold, always keeping in mind, of course, that the future is never certain. Good investors always know that.

The next few years

Specifically, the Scotiabank report states that, although short-term economic growth in North America should be higher than potential, the long-term outlook should see things coming back into equilibrium. This indeed confirms what we’ve been saying on these pages all along; that short-term fluctuations usually get evened out over the long-term, don’t they.

In addition, the report states that the short-term uncertainty surrounding NAFTA negotiations would have no lasting effects. The report was actually written before NAFTA was successfully renegotiated, but it was prescient, wasn’t it. It actually stated that the negotiations would be successful, and it was right.

Where else have we been hearing that the world wasn’t going to end because of short-term trade negotiations? Right here, and that’s because a focus spanning years should be what investors adopt instead of a week-to-week habit of panic attacks from reading sensationalized headlines.
