Weekend Reading – Inflation coming, how much Canadian, self-employed tax tips and more!

Weekend Reading – Inflation coming, how much Canadian, self-employed tax tips and more!

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.

Source: Macrotrends

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. 

1. 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.
2. 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.
3. 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.
4. 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. 
5. 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

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!

Save, Invest, Prosper!

Thanks to my passion for personal finance and investing, some great companies want to offer deals. See what might work for you below!

My very own personal BMO promo code remains on!  

Use that BMO code to get hundreds in cash back when you open investment accounts with BMO like your RRSP, TFSA, taxable account and more! 

Might as well get some free money while you can!

• With 5i Research, I’ve secured a FREE no obligation trial to learn about model portfolios, the best ETFs to own and more.
• You can get $50,000 managed FREE with for your RRSP, TFSA and more with ModernAdvisor.
• LegalWills.ca now offers a unique My Own Advisor promo code for 15% off any services – that never expires.  

Happy saving and investing folks!