My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, July 29, 2019

The Best of The Blunt Bean Counter - Common Investment Errors

This summer I am posting the best of The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting an August, 2011 blog on common investment errors I have observed over the years.

I am involved in wealth advisory for some of my clients as their wealth quarterback, co-coordinating their investment managers and various professional advisors to ensure they have a comprehensive wealth plan. I sort of chuckled when I reviewed this list, as not much has changed in the last eight years.

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Duplication of investments

Duplication or triplication of investments, which can sometimes be interpreted as diworsification, is where investors own the same or similar mutual funds, ETFs or stocks in multiple places. A simple example is Bell Canada. An investor may own Bell in their own “play portfolio,” they may also own it in a mutual fund, they may own it in a dividend fund and they may own it again indirectly in an index fund. The same will often hold true for all the major Canadian banks. Unless one is diligent, or their advisor is monitoring this duplication or triplication, the investor has actually increased their risk/return trade off by overweighting in one or several stocks.

Laddering

This is simply ensuring that fixed income investments such as GICs and bonds have different maturity dates. For example, you should consider having a bond or GIC mature in 2019, 2020, 2021, 2022, 2023 and so on, out to a date you feel comfortable with. However, many clients have multiple bonds and GICs come due the same year or group of years. The risk of course is that interest rates will spike, creating a favourable environment for reinvesting at a high rate, and you will have no fixed income instruments coming due for reinvestment. Alternatively, rates may drop and you have all your fixed income instruments coming due for reinvestment, locking you in at a low rate of return. With the current low interest rate environment, you may wish to speak to your investment advisor about whether shortening your ladder a year or two makes investment sense for you; however, that ladder should still have maturity dates spread out evenly over the condensed ladder period.


Utilization of capital gains and capital losses

Most advisors and investors are very cognizant of ensuring they sell stocks with unrealized capital losses in years when they have substantial gains. However, many investors get busy with Christmas shopping or business and often miss tax loss selling. Even more irritating is that I still occasionally see clients paying tax on capital gains as their advisors have not reviewed the issue with them and crystallized their capital losses. Always ensure your advisor has reviewed with you your personal realized gain/loss report by early December, and the same holds true for your corporate holdings, except the gain/losses should be reviewed before your corporate year-end.

Taxable vs. non-taxable accounts

There are differing opinions on whether it is best to hold equities and income producing investments in your RRSP or regular trading account. The answer depends on an individual’s situation. The key is to review the tax impact of each account. For example, if you are earning significant interest income in your trading account and paying 53% (when I wrote this article initially, the rate was 46%, quite the jump in rates) income tax each year, should some or all of that income be earned in your RRSP?  Would holding equities in your RRSP be best, or do you have substantial capital losses you can utilize on a personal basis? There is not necessarily a one-size-fits-all answer, but this issue must be examined on a yearly basis with your investment advisor. (In 2017 I wrote a two-part blog series on considerations for tax-efficient investing, which you may wish to review. Here are the links: Part 1 and Part 2.)

Tax shelter junkies

I have written about this several times, but it bears repeating, I have observed several people who are what I consider "tax shelter junkies" and repeatedly buy flow-through shares or other tax shelters, year after year.  I have no issue with these shelters; however, you must ensure the risk allocation for these type investments fits with your asset allocation.


Beneficiary of accounts

This is not really an investment error, but is related to investment accounts. When you have a life change, you should always review who you have designated as beneficiary of your accounts and insurance policies. I have seen several cases of ex-spouses named as the beneficiary of RRSPs and insurance polices.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, July 15, 2019

The Best of The Blunt Bean Counter - Estate Planning - A Tale of a Father's Selfless Act of Love

This summer I am posting the best of The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a January 2012 blog on a father's selfless act of love. That act: getting his estate in order so he did not leave his estate in disarray for his loved ones.

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Lynne Butler, of Estate Law Canada blog fame, had a blog titled “What my father’s death taught me about estate planning." What was interesting about this blog post, is that Lynne essentially got out of the way and just said you have to read this amazing article. I wondered why Lynne had so little to say until I actually read the guest post on the Getting Rich Slowly blog. Essentially, Jody (the guest poster) relayed how her father planned while he was alive, to make her job as an executor as stress free as possible. If there was ever a selfless act of love in a financial sense, this is it.

This blog was of particular interest to me as I have written several blogs on this topic: Where are your Assets, Speak to your Executor-surprise only works for birthday parties, not death and You Have Been Named an Executor Now What. Like Lynne, I was amazed at how much thought Jody’s father put into his estate. This contrasts with the average person, who often does not even inform their executor that they have been named, let alone provide a roadmap that can be followed once they are gone.

In her guest blog, Jody discusses the steps and actions her father undertook while he was alive to minimize the fees associated with administering his estate, and just as importantly, to keep the process as stress-free for his daughter as possible. While I cannot do Jody's guest blog justice (you really should open the link above and read it), the following is a summary of some of the steps her father took to ensure he minimized Jody's stress in administering his estate.

To help assist in administering your estate, you may wish to download the BDO Estate Organizer so that you have a detailed document for your family and/or executor.  You can link to the estate organizer and download the document here.

Professional team


Jody’s dad not only built a team of advisors - a banker, accountant, insurance agent and lawyer - but he also ensured that he introduced his daughter to each of these advisors while he was alive and ensured that she had their contact information. Think about how smart that was. How much easier is it to communicate and work with someone you can put a name and face to?

Fees


Jody’s dad negotiated the estate fees with his lawyer down to 2% from the typical 4-5%. One can easily see why the lawyer accepted the lower fee. Jody’s father was so organized; the estate probably took one-quarter of the time most estates need to settle. Not only did he negotiate the fee, but he also put those fees aside in a separate account.

Joint Accounts


Jody’s father added Jody to his bank accounts, which allowed her to seamlessly pay bills. As Jody is American and there are no probate fees in the U.S., this was not done for probate purposes, but only for easing the administration of the estate for Jody. See my blog on Joint Bank Accounts Documenting your Intention, to understand some of the issues of using joint bank accounts in Canada.

 

Preparing for death


Jody’s father pre-paid his funeral expenses and even had a master binder that included funeral instructions - he told Jody to go to “F” for Funeral in his binder. Jody essentially had nothing to do but follow instructions.

In addition, her father left extra money for miscellaneous expenses that always arise on an estate. The extra money, whether left in a joint accounts or actually just given to a responsible child, is very important in Canada. The banks will typically pay for the funeral expenses and the probate fees, but access to the funds for any other expenses can be problematic until probate is authorized. Consequently setting aside funds so your executor will not need to beg the bank for access to accounts is a great idea.

Executor Fees


When Jody’s father informed her she would be named executor and he offered compensation, she, like many children, declined because she did not feel that she should charge her father.

However, after undertaking the executor’s job, Jody had this to say: “After he passed away and I realized all that it entailed, I found myself thinking that maybe I should have taken him up on that offer. Being the executor of an estate — even a very well-planned estate — took about 10 to 15 hours a week for months. It’s a big job. I found myself resenting my brothers since I was doing it all.”

The above is a very insightful and honest comment and is the reality in many estates. Jody’s father showed even more insight when he disregarded Jody’s protestation on accepting an executor fee as he had arranged to give her 1% extra when his IRA was distributed.

I cannot say it better than Jody


I conclude with one more quote from Jody. “I honestly consider my father’s financial planning to be a selfless act of love. Despite his generosity, I would trade every last cent for ten more minutes with him. When someone you love dies, it’s brutal. Emotionally, and physically. Trust me; you really are in no state to make these types of financial or legal decisions on your own.”


The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, July 1, 2019

5 Lessons Investors Can Learn from the Raptors' Championship Run

The Toronto Raptors are the toast of the town and the talk of the National Basketball Association. Fresh off a championship run that surprised some pundits, they now have basketball higher-ups wondering how to replicate their success.

For The Blunt Bean Counter, I’m more interested in the lessons investors can glean from the Raptors’ success – especially tips around the psychology of investing. Both sports and investing mix hard analysis with emotion. We all know the role emotions play in sports. Less known are the psychological challenges of high-stakes investing. Researchers call them behavioural biases.

As Canadians continue to bask in the glow of Raptor success, here are five lessons investors can learn from this historic championship run. 

#1: Herd mentality


The Raptors won a championship by going their own way. President Masai Ujiri set the tone with his bold acquisition of Kawhi Leonard – who was recovering from injury and had played only nine games the previous season with the San Antonio Spurs. Coach Nick Nurse adapted the maverick approach to the hardcourt, where he innovated on both offence and defence to help the Raptors win their first championship.

What investors can learn


Following the herd can be tempting as an investment strategy — popular stocks and funds often look like successful stocks and funds. In reality, smart investors take note of the investment climate but also stop to question the hysteria of the markets. Staying true to your investment policy and principles is important not only for picking stocks, mutual funds and exchange-traded funds, but also for timing decisions to buy and sell.

Avoiding the herd doesn’t need to push investors to the extremes of contrarian investing – but it does require independence and well-defined goals.

#2: Overconfidence


All athletes need to master that balance of confidence and overconfidence – avoiding the pull of “too high or too low.” The Raptors made a mantra of the practice, by preaching the benefits of “staying in the moment.” Because when playing top-flight teams like the Golden State Warriors and Milwaukee Bucks, an overactive ego can prove as damaging as a faulty jump shot.

What investors can learn


What goes for athletes is also true for investors. So many investors think that a few smart investing moves will translate into long-term investing genius. In this way, overconfidence ties into self-attribution bias, when investors believe their success can be attributed only to their investing acumen. If only investing were that straightforward. Even legendary investor Warren Buffett has made mistakes while wrestling with the limits of human intelligence and the inevitable factors beyond his control.

#3: Diversification


The Raptors present an interesting case of a superstar paired with balanced team. While Kawhi Leonard proved pivotal to the team’s success, several Raptors contributed double-digit scoring. This led commentators to describe the Raptors as one of the more balanced championship teams in recent memory. The Raptors’ tendency towards balance only grew as the postseason progressed, and helped the team compensate for a Kawhi limited by injuries and opponents’ double-teaming defences.

What investors can learn


It may constitute almost the first rule of investing, but we tend to forget it: diversify your holdings. Much as basketball teams can’t rely on scoring from one or two sources, investors can’t depend on big gains from a small number of similar investments. Portfolio risk needs to be spread among a variety of investment vehicles and various sectors.

Some investors fail to diversify due to familiarity bias. The theory goes that people trust – and select investments based on - what they know best. They will therefore focus on domestic stocks and funds or those stocks and funds that are household names. By investing in international stocks, adding holdings in several sectors and including both low- and high-risk investments, investors put themselves in a better position. A word of caution: when exploring less familiar investments, seek out dependable research and advisors.

Familiarity bias can also be viewed as a home vs. international bias from an investing perspective.

As I am writing this, Kawhi has not yet decided whether to stay with the Raptors or return home to play for the Los Angeles Clippers, the other rumoured option. He is weighing many factors, but his choice pits Los Angeles, where he was born and raised and has family and friends, against Toronto, an international destination that is somewhat familiar but is still a foreign location and certainly not home. If Kawhi looked at this from an investment perspective, clearly he should sign with Toronto. (And now I’m showing my own bias – for the Raptors.)

#4: Worry


It’s not just sports fans who experience anxiety as they live and die with their teams’ fortunes. Even professional athletes have been known to lose sleep due to worry, as former Raptor Jonas Valanciunas has acknowledged. When tired athletes bring the previous night’s restlessness to the court, their performance generally suffers. Raptors management recognizes this, and educates the players on how to use rest to prepare their bodies and minds for competition. This year’s edition of the Raptors was also helped by a coach, in Nick Nurse, who cultivated a calming culture.

What investors can learn


Losing sleep may not directly influence investing performance in the same way as it drives on-the-court results. But researchers have uncovered interesting ties between worry and investing. Victor Ricciardi, who studies the psychology of investing, found that increased worry about a stock decreases an investor’s risk tolerance for that stock and the chances they will buy it. People may want to control their worries – but we all struggle to master our emotions around investing. For some this can lead to sleepless nights, which can certainly impact us at the office and at home. Part of investing is matching our risk tolerance to our rest tolerance.

#5: Anchoring


Raptors’ fans may not know the anchoring bias by name, but they know it all the same. Years of seeing good teams bowing out in the playoffs – sometimes in embarrassing fashion – conditioned fans to expect defeat for the team. Their beliefs about the future were “anchored” in past Raptors performances. So much so, in fact, that one American sportswriter asked Raptors players about Torontonians’ so-called defeatism. Acquiring Kawhi Leonard helped shift fans’ perceptions, but many still found it difficult to believe this year would be different. Now a championship has given Raptors’ fans an entirely new, and positive, anchoring event to form their expectations in the future.

What investors can learn


Anchoring bias can unsettle our portfolios in surprising ways. The classic investing example concerns purchase price: investors hold on to a stock because they remember their purchase price, not the stock’s decrease in value. They use that original price as an anchor. On the other end of the spectrum, investors may exhibit an extremely low tolerance of risk based on past performance. Think of a new investor who lived through the record one-day TSX drop in 2008 and runs from the markets as a result. Even the investing styles of our parents can anchor our perceptions of the correct way to invest.

Anchoring, like all investing biases, is difficult to avoid. Even our best attempts at fully rational investing behaviour can’t rid us of the emotions that make us human. What we can do is know our personal biases, understand why they may exist and access the best research and professional advice possible so that facts and data inform our investing decisions. And be sure to ask questions; even advisors have their investing biases. Professional advisors should be able to explain their investing recommendations to you.

I hope you found this post fun and informative. As this is the last original post until September (I will post The Best of The Blunt Bean Counter a couple times a month in July and August), I wish you a great and safe summer.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.