Weekend Reading – Inflation coming, how much Canadian, self-employed tax tips and more!
Welcome back to another Weekend Reading edition…highlighting some of my favourite articles from the week that was across the personal finance and investing blogosphere.
Just in case you missed last week’s edition you can find here!
What’s up this week?
I think what’s coming is inflation.
First up, a primer on inflation. Inflation is essentially the rate at which the cost of living increases. So, what you could buy a few years ago with $50 now costs $60.
In recent years, we’ve seen inflation hover around 2-3%. But it doesn’t always stay in that range.
I think higher inflation days are coming personally.
Even if they don’t. if you don’t think 2% or even 2.5% inflation isn’t a big deal – think again. A consistent 2.5% inflation rate over a 25-year timeframe will cut your purchasing power by about 50%.
That’s right. Prices/cost of living will essentially double in another 25 years.
How do we beat inflation? How are you going to beat inflation?
Here are some ideas.
- Consider real estate. Real estate has long been considered a hedge for inflation because people have to live somewhere. So, owning real estate, as prices rise, you’ll get appreciation or higher rent or higher REIT values along the way. That’s the theory.
- Many investors hope that capital appreciation (i.e., a rise in stock prices) will occur to help offset inflation. Maybe. I prefer dividends. Purchasing a basket of dividend-paying stocks (that reward investors for being shareholders) I believe offers a great way to stay invested and earn growing dividends to help combat inflation.
- Own commodities. Commodities are a broad category that includes precious metals, electricity, oil, the cost of your breakfast orange juice, natural gas, and more. As the price of a commodity rises, so does the price of the products that the commodity is used to produce. So, owning assets or companies that produce routine good and services is a good inflation hedge.
- Real return bonds. I know, bonds right? Although I don’t own any and don’t intend to….these types of bonds present a decent option. You may know with typical fixed income assets, inflation the enemy of bonds – since they can quickly lose purchasing power if inflation surpasses the returns. Real return bonds have the unique quality of growing and increasing interest payments made to you with rising inflation. This aspect helps your capital grow (based on inflation rates) and preserves your purchasing power.
- Gold? Yes, maybe. Often cited as a hedge for inflation – gold is a real, physical asset, and tends to hold its value…somewhat. I personally don’t see gold as any perfect hedge. Holding an asset that pays no yield doesn’t really appeal to me.
I feel inflation is bound to come and I think we’ve seen it play out in our Canadian housing market. It’s just too hot and needs to cool down. Rob Carrick recently highlighted yet another example of how some Canadians, who have good paying jobs, simply have no way to afford their own home.
From the article:
“In a hot housing market, it means nothing that you have a household income of more than $200,000 and a down payment of $450,000.”
I argued a few years ago, rates might be on the rise (pre-COVID), and I figured we should get prepared ourselves. That never played out.
While low rates are great for borrowing to finance homes, cars and businesses – credit is cheap and they promote consumption. That may or may not be the right thing to do. Definitely not in excess where many Canadians are. Prolonged low rates do not reward fiscal responsibility, by businesses or individuals, and yes, including our own government.
I don’t have the answer to what the financial future might hold, so I remain cautious with our investments and our overall financial plan. I will continue to pay down our debt. I’ve already maxed out contributions to our TFSAs and RRSPs in 2021 – so all money is invested right now. I will continue to save money and increase our cash wedge.
I will of course remain invested in my basket of dividend paying stocks and low-cost ETFs for growing income.
This was my latest dividend income update here.
Simple, but effective I hope, as I see inflation coming.
What about you? How are you investing or changing your financial plan for higher inflation? Do you see it coming?
Weekend Reading and Reminders
Don’t forget, just a couple of weeks to go!!
You can win 1 of 3 TurboTax Canada online versions to use this tax season by entering my giveaway.
I hope to provide some tax tips next week to help you out too!
GenY Money updated her post that highlighted her 5 favourite Canadian dividend stocks to invest in. Happy shareholder of a few of those in fact! A few of those should help fight inflation as well.
An interesting read here on PWL Capital’s site from a portfolio manager about the right amount of Canadian stocks to own.
From the article:
“The evidence indicates we should aim for a “not too hot, not too cold” approach to Canadian equities. We want the right percentage to enjoy the diversification effects that provide a minimum volatility profile for a given level of desired return. That’s why we target the following weightings in our equity portfolios: 20% Canadian, 40% U.S and 40% International/Emerging Markets.”
To me, given I’m going to retire in Canada, live in Canada and spend most of my money in Canada, 20% seems low considering many of the Canadian stocks I own also have some built-diversification beyond Canada. Maybe that’s my home bias talking? Probably is.
Assuming that, from a return perspective, you may be interested to know that 10-year returns for VXUS, although a great and popular international and emerging markets fund, has only delivered 5% returns over that time period. Not bad, but not great. My Royal Bank stock and other Canadian dividend paying stocks have done far better but that’s just one example. I’ve had a few duds too like VXUS might also hold.
So, what are your thoughts on a modest Canadian equity weighting? Do you align with the portfolio manager’s thinking on 40% international/emerging and just 20% Canadian? Certainly anything higher than 50% in Canada might be far too much.
Talented writer Tanja Hester wrote about the value of a long break. Certainly, she’s earned it from all the work it takes to write a book. A good read from a wellness standpoint too. Tanja:
“Most of us are overscheduled and under-rested. And when we’re moving quickly from one thing to the next, it’s easy to lose sight of the big picture. It’s easy to confuse wants and needs. And wants are fine. People who write about money and tell you to cut out all the wants are robots, not actual humans who experience joy.”
Yes, so don’t judge us when we spend more money on cheese or wine or craft beer in a week than our cell phone bills might cost in a month. Life is for the living.
I enjoyed Dale’s take in his latest attempt to make some sense of the markets on MoneySense.
On Cashflows & Portfolios, we produced an early retirement case study for a couple without any workplace pension but a healthy pair of Locked-In Retirement Accounts (LIRAs) to draw down. Check out what their max spend might be in retirement. Impressive and far beyond what their conservative estimates were.
No reader question of the week? I have a few in my inbox to answer and will publish soon. In the meantime, don’t forget about my growing FAQs page. I post some frequently asked (and answered) questions there!
I’ve also updated my dedicated Retirement page to ensure you can learn from successful retirees, how they invest and what they invest in, how they consider decisions about taking their CPP and OAS and more.
Family Money Saver said forget Non-Fungible Tokens (NFTs) – they “are worthless garbage.”
I like cats, I own cats, I probably like digital cats too but I’m not going to trade digital cats.
Reverse the Crush highlighted some of the greatest investors of all time.
Last but not least, speaking of great investors and inventors!
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Thanks again for putting together some interesting reading.
Inflation is already here and coming on strong. We just had some home renos done and more soon, and one of the project folks mentioned they are putting prices up next week as all their costs from their suppliers have gone way up. We live in Waterloo Region and have watched housing go nuts. International shipping is the dickens right now (where I work we do a lot of importing), and transportation costs and service were in a pinch before the pandemic even started. I am sure monetary policy has a non-negligible effect on inflation ultimately, but there are macro factors at work that I rather doubt central banks and government can hedge their way around at all.
For my part, I intend to stay invested and keep contributions up, increase some long term savings in a balanced fund, buy what we’ve saved for sooner than later, and continue to learn and be valuable in my place of employment. House will be paid down in approximately four years, and we have no intentions of moving. Just feathering the nest. Hopefully some of those things will help us manage.
Totally agree Rob re: inflation is here and more on the way. Makes me think I need to continue to invest in inflation-fighting stocks.
Housing is going bonkers in your area I hear….
I think you’re smart to keep saving. We are and we could likely semi-retire soon but the future is so uncertain I wouldn’t want to predict how messy things could get. Maybe I’m just becoming a bit of a “bear” when it comes to the markets and more risk averse as I get older but this will take generations to pay for if ever…
Like you, house is paid in 3.5 years here. Once that debt is gone it will be a major relief 🙂 No doubt it will help you too!
Thanks for your readership.
Yep it’s gone bananas around here! The type of housing we’re going to need in this region to support future growth isn’t really available or underway, yet. Waterloo itself, where I grew up, is almost unrecognizable in the area between UW and WLU – but that vertical high density housing is geared to students, who eventually grow up. I live in Cambridge now, and I think we’re getting to the end of the viability of paving over green space with low-rise housing.
I’m looking forward to the mortgage burning but resisting the temptation to plan in specific where the cash flow will be directed – the oldest of our two kids will be turning 17 that year, so we may be coming alongside to help a bit with post-secondary costs. Neither of us are big on the notion of paying the kids’ way for them – we think they need a lot of skin in the game in order to value the opportunity.
I hear you on becoming more risk-averse, however since life always has risk, I figure it’s important to mitigate and manage risk without worrying at it. Equities are a good long-term bet because they best reflect continued human ingenuity, IMO.
Anyway, thank you for continuing to put together thought provoking material! Look forward to following your journey while we’re on ours.
I think as long as low interest rates remain around Rob, and people feel money is cheap, housing will soar. The pandemic certainly didn’t stop anyone from “movin’ on up”.
Our mortgage burning party is about 3.5 years out if my math is correct. While important to kill debt, it’s manageable not into the 5-figures. It wasn’t always that way and it caused a few sleepless nights about 10-years back.
So, on that note, I’ve always tried to mitigate risk. I’m rather conservative hence my love for dividend paying stocks maybe. I get paid to stay invested. Pretty nice concept.
Thanks for following along and stay in touch! If that 17-year-old want to build wealth, make sure they max out that TFSA in the coming years when eligible. I can send them some links!
I personally think 20% in Canadian Market is too low. I am building a mix of dividend and growth portfolio so need to keep it higher than the suggested 20%. I am still evaluating but my plan is 40% Dividend paying CA, 40% US (20% QQC.F and 20% XUU, yup I like Technology), 20% International (10% Emerging (ZEM) and 10% Developed (VIU)). What do you think? Also I have lots of work to do in 2021 and 2022 to make this balance. Lots of funds all over the place including GICs with 2.75%-3.75% rates.
For inflation, I totally feel food prices went up more than 10% in the past year. I don’t know how they calculated the inflation to be close to 0 or minus considering the home prices. Maybe they only weighted gas and airlines.
I would like to land around 50/50 or maybe 60/40 myself – with a slight bias to U.S. and international vs. CDN. I just feel 20% is too low for me given I live in Canada, I spend my money in Canada, there are established companies in Canada that pay dividends that are tax-efficient in Canada, etc.
Maybe I have it wrong – I dunno!?
XUU and VIU are great funds. I would keep those in your TFSA and RRSP accounts first before taxable investing though. Just me!
I’ve been in debt twice in my life. First time in 1970 when I bought my first car (used) and loan paid off within six months. The only other time in 1999 when my wife and I bought the house we’re still living in. Previous to that it was apartment renting and taking public transit in order to save for a fair sized down payment. Sold off all the taxable portfolio to pay for a good chunk of the house. Paid the mortgage off in about three years. We were both around 50 years of age when we bought our home so it’s not like we were young. Paid for it ourselves with no help from the parents.
My wife and I are both debt averse so that’s never been a problem for us.
Both of us came from a lower middle class background, so we didn’t get it easy finance wise. I don’t have a university education and I’m actually mathematically challenged but since the early 1980’s I was determined to learn how to invest. It was a slow grind, with many mistakes along the way, but I finally got there.
We’re roughly about 20% in U.S. and international equities. The rest is all Canadian, whether that be cash or bonds, but by far our largest holding is in individual Canadian dividend growth equities in the non-registered portfolio.
In retirement still adding to our TFSA’s with maximum contributions each year (ZBAL). Whenever we have cash savings and dividends we just re-invest into our Canadian dividend growers. I’ll be starting my mandated minimum withdrawal from the RRIF this year (also ZBAL). Whatever is left after tax will just get re-invested into the non-registered.
The simpler I keep investing, it seems the better we do financially.
Thanks for your details. Not uncommon to see many Canadian dividend investors have a high % of CDN content. My target is ideally 40% and working my way there now.
Interesting call on ZBAL for your RRIF. I could foresee us investing in something similar for my wife’s DC plan once she has to convert to a LIRA > LIF. Just set-up for min. withdrawals and go in our 60s+ with that one.
I think you may be right about increased inflation Mark. First the pent up demand and then the massive quantitative easing has to have an effect. Our plan is that the dividend increases will continue to provide protection for this. I think the conventional wisdom of diversification does not apply equally to all of us. My portfolio is about 80% CDN, 20% US dividend paying stocks. The Canadian companies (ie. Banks) do business internationally as well as utilities and some Reits. Large US companies do business all over the world. For me it’s a more conservative way of staying with companies I understand. I’ve been retired now for 3 years and the mix is still working very well. Average annual return of 11% for 21 years.
Hey Div – what CDN stocks do you own? Similar payers to me?
Like Henry Mah a bit maybe, he only has 11 or 12 dividend paying stocks for his entire portfolio. All Canadian no less!
“Large US companies do business all over the world.” I agree, I guess I’ve always struggled a bit when some advisors say it’s critical to invest in beyond the U.S. Historically, even for 20 years, the returns don’t prove it.
“Average annual return of 11% for 21 years.” = amazing.
Stay in touch and write back when you can. It would be good to compare stock notes!
Thanks Mark, it has been quite a ride. We used to own CNR, Metro, but eventually sold them when they got much higher then our purchase cost and traded for higher dividend payers. As we got closer to retirement we solidified for more dividends. We have all the banks, Fortis, Emera, BCE, Telus, Capital Power, Premium Brands. (I spent my whole career with PBH) There are a few others in the portfolio but we can compare another time.
Gotcha. I’m still a big fan of CNR.
Love all the banks – owned the big 6 for the last decade + utilities and renewables such as FTS, EMA, BEPC, BIPC, CPX and AQN.
Love the Telcos too = BCE, Telus.
Interesting about PBH. That’s a great stock chart since 2009+ 🙂
Thanks for the shout out and weekend reads, Mark! Inflation is something investors need to think about in this environment. Hope you have a great weekend!
Most welcome and yes, I believe inflation is coming Graham. How are you doing to manage that?
Real estate is our inflation hedge. And if inflation goes crazy and our real estate appreciates substantially then we may look to liquidate to invest in something more passive. But only time will tell.
Indeed. Hard to say what might happen long-term Maria. Assuming you can keep your tenants you seem to be in great shape!
Still have 9 rentals? 🙂 Quite the cashflow!
I agree inflation is coming. Especially with all the helicopter money being printed by governments and especially the US Federal Reserve last year. Most of this money is going to be pushed into real estate, the stock market and I believe cryptocurrencies too as shown in the recent run-up of these 3 asset classes. I recently bought some Bitcoin ETF’s for my RRSP, TFSA, and the kid’s RESP when they first started trading in late February. Not everyone may agree, but I think Bitcoin is going to keep rising at a fast pace due to it being an “inflation hedge”.
You might be right on the Bitcoin EZ. So hard to say, in such early days of this. I often wonder if they thought of gold the same way 100s of years ago!
I have been retired for 4 years now. My Canadian stocks represent 40% of my portfolio, US ETFs 40% and cash and cash equivalents 20%. Most of my Canadian stocks operate in the US also and the US stocks in the ETFs are mostly international in scope. I now own no international equity, per se. I am comfortable with this allocation and the stocks held. I think that reducing the Canadian component would increase my exposure to foreign exchange risk and increase my taxes payable on the dividends received.
It is a sunny Saturday here and the snow is now all gone after this week’s balmy temperatures. There are buds on the trees and the birds are coming back. Happy days.
I think that’s my desired balance too Jan: ~40% CDN + ~40% US and then the rest from around the world. I hope to keep a modest/small cash wedge in retirement. About 1-years’ worth of expenses.
Go away snow!!!! 🙂
Have a great weekend,
As a hybrid portfolio manager, I really expected you’d be in for a Cryptokitty or two. Disappointing. The dividend growth potential from breeding is exceptional. Personally, I can’t partake. I’m allergic and the last time I held a cat, it bit me. To be fair, he was being vaccinated.
I think the closest investment to Cats you could get me near is maybe a share of Andrew Lloyd Webber.
Have an average weekend, and thanks for the link …I guess.
Ha. Unspammed. Akismet may or may not like kitties, cats, or even cryptokitties. I have no idea. 🙂
Enjoy the weekend,
Good read on inflation fighters. Hard to say whether we’ll see it rise a lot.
I do agree on higher taxes. Debt is out of control.
Canadian equity bias here as well. CDN 49%, US 36%, INT 15%
That seems about right for my long-term plan, though I’ll probably be closer to 40% CDN + 40% US + 20% International when all said and done in the coming years once I add more XAW, VTI, etc.
The reality is, so many companies operate globally now so there is some built-in diversification. They can’t grow if they don’t look beyond Canada.
That’s where I think I should be too. Possibly trickier to achieve in decummulation phase, considering taxes, different acts/holdings and allocation weightings. But it can be done.
I’m concerned about inflation too, but I suspect it will be a short-lived, post-Covid surge in prices due to rampant pent-up consumer demand and slow recovery of distribution/supply. Longer-term, the western world consists of aging economies with lower demand for consumption. Inevitable increases in taxes to pay for the pandemic stimulus will sap demand as well. Ben Carlson made an interesting observation on a recent Animal Spirits podcast where he said he’d be more concerned about wage inflation than consumer price inflation – wage inflation will lead to much greater long-term inflation.
Agreed that 20% is too low for Canadian exposure. It’s linked in the PWL article, but if anyone wants to see it, there’s a very good post by Justin Bender substantiating the case for it too. I recall reading a Vanguard paper that said Canada was one of the few countries where home-bias made sense. I also recall another paper some 10 years ago that made the case that Canadians can underweight emerging markets because our market is more correlated with them than other western economies. For me, the exposures in the asset allocation models make a lot of sense.
That’s what I recall as well re: Vanguard. Thanks for the Justin link.
I haven’t had time to listen to Ben and gang on the podcast but will do. Maybe during my walk to groceries today.
I fully appreciate the demographic shifts and the case for income so it might also make some sense to gravitate to Canada because our companies here tend to be dividend-friendly and retirees like the income from dividends vs. the total hope of just capital gains and market volatility that goes with it. Just a hunch. That actually might pump dividend paying stocks higher with time?
I dunno, I am genuinely concerned about inflation. I see it coming. If I’m wrong, great. If not, I’m somewhat prepared. Somewhat 🙂
Besides inflation, or maybe inflation will be a result of it, but rising taxes will also be something we’ll have to face. Fortunately, with my Income rising at 7% to 10% every year, we’re not worried.
Well done cannew. Still owning the same stocks? Same 11 or 12?
Not many dividend increases planned from CDN banks if any in 2021. You and I will need to wait until 2022 me thinks…?
Thanks for the mention Mark! Have a wonderful weekend, hope there’s some sun in Ottawa this weekend.
Me too! Should be a cool day but the sun is here and the coffee is on! Best wishes.