ENGLISH VERSION - YOUR ONLINE ADVISOR
MARKET AND RISK
Is this a good time to invest in the stock market?
This question, which we receive very regularly at McLean Capital, requires clarification from the start. When you invest in the stock market, you invest in companies. The stock market is only an intermediary between you and your companies at the time of a transaction. The question could therefore be rewritten: "Are there any interesting opportunities on the stock market right now?"
The business cycle should not come into play to answer this question. It is very difficult, even impossible, to predict economic cycles. In addition, in the long term, the effect of compound interest makes the entry moment less important. As an example, someone who had bought the largest stock index, the S&P 500, on December 31, 2007 just before the Great Financial Crisis of 2008, would still have achieved an annual return of 9% over the next 10 years.
What portfolio adjustments do we need to make or that McLean Capital would make in a stock market crisis?
1. If we have excess cash, it can be a good time to invest in great opportunities. You have to try to take advantage of Mr. Market when he drops the evaluations of some quality securities.
2. It may be a good time to rebalance the portfolio. In other words, increase our weighting in stocks that have become more attractive and reduce our weighting in stable or less attractive stocks.
3. Nothing. If we are well invested in high quality companies that are very well managed, they tend to gain value during crises because they can take advantage of market conditions. They can buy their own shares, make strategic acquisitions, advertise more to gain market share while competitors cut their budgets, and so on.
Where will the markets be in one year?
We do not know. The important thing is not to predict the level of the stock market in a few months or a year. The important thing is to choose our businesses properly and focus on their financial results.
The stock market has been going up since 2009. The S&P 500's P/E ratio is 22 (2019). Is it time to sell?
The price-earnings ratio of the S&P 500 is of limited value because one should be interested in individual opportunities and not the average that the S&P 500 represents.
It is possible for a company to trade at a reasonable price even if the general market is trading at a high price. There can be depressed sectors and fast-growing sectors.
In addition, the level of interest rates greatly influences the valuation of assets such as shares of public companies. The low level of current interest rates may explain the current price-earnings ratio.
Finally, it is not true that the stock market has been rising steadily since 2009. The years 2011, 2015 and 2018 have not been good years for global markets including the S&P 500.
Are socially responsible funds any good?
Not always. The definition of socially responsible is very broad for funds and therefore sometimes it is debatable if some of these funds really respect this mission.
In addition, care must be taken to focus on quality investments and these funds may not respect this principle.
Is it a good idea to have a large position in one specific stock in my portfolio?
It is true that some investors like Warren Buffett have had a lot of success by strongly betting on a few positions but it is important to know that others like Peter Lynch have also been very successful in being very diversified. Therefore I would say it's safer to put a limit between 5% and 10%.
Is it a good idea to invest in SNC-Lavalin after the abrupt drop in 2019?
For McLean Capital, it's no. Why? Because this company is complex and does not meet our quality criteria.
What is CAPEX?
The term "CAPEX" comes from "Capital Expenditures".
This is a very important book accounting value because CAPEX is not directly included in a company's operating expenses. Only depreciation of fixed assets is included. For example, if you buy a computer for the business, this expense will not show up in expenses but rather in the cash flow section. The expense associated with this computer will be the assumed depreciation of the computer. The rules could be to depreicate over 3 years despite the fact that the computer is useful for 8 years.
What must we do if a key executive like Warren Buffett, Alain Bouchard or Jeff Bezos leaves his company?
For McLean Capital, we want to invest in very high quality companies. So exemplary management should not be the only criteria for making an investment.
We still need to get to know the new management to ensure that it meets our criteria. Generally, the choice of an exceptional successor is part of an exemplary management team, so one would expect that the key leaders of our companies will make good choices.
What are Principal Protected Notes (PPNs)?
It is an investment that guarantees your starting capital and gives you a return that is calculated based on the performance of one or more stock indices.
A traditional example of a return calculation is based on a 35% participation percentage, which means that if the stock market returns 10% in a given year, you will earn a 3.5% return with your Principal Protected Note.
You have to be very careful about this type of product because advertisements are often misleading; for example they will show the total return over 3 years but try to make you think that it is an annual return. In addition, the fees can be very high. We therefore obtain a yield similar to a traditional GIC but with the risk of making 0% and a very limited upside potential.
Your returns are also considered interest income, therefore you pay higher taxes than when treated as dividends and capital gains.
Is it a good idea to invest in Principal Protected Notes (PPNs)?
Principal Protected Notes (PPNs) essentially give low returns similar to a guaranteed investment certificate. The promoters of these products often use misleading advertising and fees are high.
What is short selling and how does it work?
Short selling is a type of trade where you try to take advantage of a price drop in a given stock.
The operation is relatively simple. Here is an example of a short sale on Coca-Cola stock:
1. You borrow 1 Coca-Cola stock that is currently selling for $50. Your broker will arrange the loan for you.
2. You immediately sell this same stock on the stock market for $50. Your brokerage account now has $50 in cash and you owe 1 Coca-Cola share to your lender.
3. 6 months later, you buy 1 Coca-Cola share for $45 and give it back to the lender. You pay $1 interest on your loan and you keep $4 in profit. So you got a profit on the decline of the stock of Coca-Cola.
You have to be very careful with short selling, because if the stock in question goes up, it can cost you a lot.
How do the fees charged by McLean Capital compare with the industry?
They are much lower and 100% transparent.
In general, a financial advisor or broker only discloses to you a management fee of about 1% but in reality your fees are much higher.
Here is an example of a fee structure that represents the industry average:
Advisory Fee: 1.0%
Administrative Fee: 0.5% (hidden)
Fees for mutual funds you own: 1.2% (hidden)
Total costs: 2.7%
Are share buybacks a good thing?
When a publicly traded company buys its own shares, it's called a share buyback.
We will often perceive this practice as a positive gesture that managers have confidence in their business, but we must be careful. Managers can be compensated on the growth of earnings per share and these are obviously influenced by the number of shares in circulation (denominator).
Sometimes, even if the company's profits do not grow, managers can create "artificial" growth in earnings per share by buying shares of the company in the markets. The important thing is to determine if the buyback is done at a price that makes sense. If the company buys back its shares when the stock sells below its intrinsic value, the managers bring value to the existing shareholders. Otherwise, they destroy value; all the more so if they are overpaid for doing so.
What is a convertible debenture?
It's like an bond where you get interest but you also get an option to convert your debentures into shares of the issuing company at a pre-determined price. There is a maturity date on the conversion option. If the price of the stock rises above the conversion price, we could make money by exercising our conversion power.
In Canada there are not many convertible debentures available and few of these issuers are strong enough to be good fixed income investments.
Are their interesting bond opportunities in 2019?
It's very difficult to find opportunities right now. In Canada, one can obtain about 2.2% (October 2019) interest with short-term maturities and 2.6% (October 2019) with maturities of 10 years. It's very low. In addition, if interest rates rise, bonds with longer maturities will lose more value.
We can turn to preferred shares or convertible debentures but we must always put the security of our capital first.
How should I allocate my investments between stocks and bonds?
At McLean Capital, we believe that the answer to this question usually depends on 3 factors:
1. Your time horizon for your investments
2. The level of interest rates
3. Opportunities in the stock market
The longer your time horizon, the lower interest rates are, and the more stock opportunities are present, the less you need to hold bonds.
It should also be remembered that even as you approach retirement, you are unlikely to withdraw all your investments overnight. If you plan to disburse 5% or less of your RRSP annually, your horizon may still be long term.
To get more information about specific weights or what is a long term time horizon, please contact us:
Should I hold bonds in my portfolio?
There is a misconception that bonds are less risky than stocks. In reality, they are less
The difference is important because if you have a long-term horizon, the short-term volatility of an investment becomes less important, or even irrelevant.
The real definition of financial risk is the possibility of losing money permanently. When your bonds give you a return under the level of inflation, you lose purchasing power permanently.
Are bonds safer investments?
Bonds are not necessarily safer investments, although they are usually less volatile than stocks.
Holdings bonds with low interest payments can reduce your future returns and therefore cause "opportunity cost" type risk.
Also, even though the principal on a bond is supposed to be reimbursed at a given time in the future, there are many cases where this did not occur. Companies and countries have used bankruptcy court in the past causing bondholders to lose a lot of money.
Are preferred shares a good alternative to bonds?
There are different types of preferred shares:
1. Perpetual preferred shares: these can be very sensitive if interest rates rise.
2. Preferred shares that reset: the interest rate is reset on a certain frequency (every 5 years for example) but companies may have the right to buy them back so this is not always advantageous for the buyer.
3. Floating preferred shares: these can be more interesting but we have to do our homework. The interest rate is continuously readjusted (every quarter for example).
You have to be careful with this type of product.
Many speak of an impending recession. Should we wait before investing in the stock market?
We should not make our investment decisions based on the risk of a recession because it is virtually impossible to predict recessions. Economists have predicted about 1 in 2 recessions historically so the prediction of a future recession is probably the result of chance. Since the economy is generally growing and we can invest in companies that are gaining value across all economic cycles, in the long run, recession or not, we should invest if opportunities are available.
What is the risk of currency fluctuations on our US or international investments?
Historically, the variation in the exchange rate has not had a significant impact on a Canadian/US portfolio over a long period of time. Some years the currency can help us and in others hurt us. There is no advantage in trying to predict currencies.
We must focus on our businesses. In the long run that is what counts. In any case, predicting currency fluctuations is extremely difficult, or impossible, in most cases.
Are economic factors important when making investment decisions?
McLean Capital's philosophy is to focus on the individual companies that are inside our portfolio. We focus on learning about their competitive advantages, their business models, their financials, etc.
Although some economic metrics like consumer confidence can possibly give an indication of the stock market returns to expect in years to come in general, we believe in studying individual opportunities one-by-one.
What is the importance of interest rates?
Interest rates are extremely important for economic activity and the valuation of assets.
Valuations in real estate, stocks and bonds all tend to go up when interest rates come down.
For real estate, lower interest rates help you afford a bigger mortgage. For stocks, interest rates have an inverse relationship with valuation ratios as well. For bonds, when interest rates come down, old bonds that pay more interest are worth more.
Low interest rates can really fuel valuations.
Is the RESP (Registered Education Savings Plan) a good investment vehicle, how does it work and how can it be optimized?
Yes, the RESP is the most generous registered plan so it should be prioritized before others.
The following are important conditions of the RESP:
- You can contribute up to $2,500 per year per child.
- You can contribute up to $5,000 maximum to go back one year at a time. So 10 years becomes the critical age if we do not want to lose subsidies.
- The Canada Education Savings Grant (CESG) is from 20% to 40% based on adjusted family net income. The maximum amount paid by the CESG is set by the federal government. Annual maximum of $600. Total maximum per lifetime beneficiary of $7,200.
- The Quebec Education Savings Incentive (QESI) is from 10% to 20%, depending on adjusted family net income. The maximum amount paid into the QESI is set by the provincial government. Annual maximum of $300 in QESI. Total maximum per lifetime beneficiary of $3,600 in QESI.
- No need to be the parent, because grandparents, an uncle, an aunt, a friend of the family can also subscribe for a child who is dear to him. So if parents cannot contribute, grandparents can help.
How to choose between an individual or family RESP (Registered Education Savings Plan)?
A significant difference between the individual RESP and the family is that the individual RESP does not require a direct family link. Grandparents often open RESPs for their grandchildren and must do so with individual RESPs.
At the subsidy level, it's exactly the same thing between the individual and the family RESP.
For the parents, here are the advantages of choosing a family RESP if you have several children:
- An account VS several accounts so simpler
- More flexibility when disbursing.
Sometimes the provincial grant is not deposited when you contribute for one child and you pay for another, so you have to be careful.
What is the difference between a registered retirement income fund (RRIF) and a life income fund (LIF)?
An RRSP account must be converted to a RRIF (or annuity) in the year of the holder's 71st birthday (otherwise, it is wound up and the total amount is taxable in the year of the wind-up).
An LIF account is essentially the same as an RRIF but the funds come from a locked-in retirement account (LIRA) or a locked-in retirement savings plan (LRSP).
The following are important conditions of the RRIF and LIF:
- There is no minimum age for transferring funds in these investment vehicles but the maximum age is 71.
- There is a minimum annual withdrawal. This amount depends on your age and the total amount placed in the account. At age 71, for example, you will need to withdraw 5.28% of your savings annually. At age 80, 6.82%. As you get older, the percentage rises to 20% from age 95.
- Investment growth is tax-sheltered until withdrawal.
- The amounts received from this plan are added to your income for the year.
Click here to learn how to optimize your taxes with a RRIF or LIF.
I have an employer pension plan. I have maxed out my RRSP and TFSA contributions. Are there other tax free accounts available to me?
Here are some options for you:
1. If you have children, you could contribute to a Registered Education Savings Plan (RESP).
2. If you have a spouse, you could contribute to the RRSP and TFSA of the spouse.
3. The best way to save taxes is to maintain high quality securities over the long term so you do not reap capital gains.
Can you name a beneficiary to an RRSP or TFSA in Quebec without using a will?
No, in Quebec you cannot name a beneficiary on a registered account. Only the will prevails.
Is it a good idea to invest in the Fonds FTQ to obtain the tax credit?
Not necessarily because despite the tax credit, the overall return could be disappointing if the Fund's performance is below average. The return of the Fonds FTQ has not been excellent historically even with the tax credit.
The Fonds FTQ does not have the mission to obtain good returns. Its mission is to create jobs in Quebec, train Quebec workers and stimulate the Quebec economy, often by investing in riskier securities.
You also need to be aware of the disadvantage of the restrictions to get back your capital. You must be invested in the Fund for a minimum of 2 years and you can usually get out only if you are retired (if under 65) and you are over the age of 45. In addition, the exit procedure is difficult.
If I take money out of my TFSA, how does it work to put it back in at a later date?
1. You must wait until the next January 1st. For example, if you withdraw on December 1, you only have one month to wait.
2. Past TFSA gains can all be reinvested. For example, if you have accumulated $100,000 in your TFSA but the maximum contribution is $ 63,500 (2019), and you withdraw the $100,000 in a given year, you can deposit $100,000 + the new contribution on the next January 1st.
How to choose between the RRSP or the TFSA?
1. What is your objective? Is this investment for retirement or is this for another project?
2. What are your expectations for future income? If your income should be stable or come down, maybe the RRSP is a better option. If your income is expected to increase substantially in the future, it may be better to wait before investing in your RRSP to get a bigger tax deduction in the future. You could even use your TFSA to contribute to your RRSP in the future.
3. Do you have ample income, liquidity and stability so that you won't need to take money out of your account? If not, the TFSA is probably a better option.
Building scenarios with your advisor can also be a good way to answer this question.
What happens if I exceed the annual TFSA contribution limit?
A penalty of 1% per month applies to the excess contribution as long as it remains in the TFSA during the same calendar year. The change of year marks the entry into a new contribution period, so your excess could be canceled.
If I haven't contributed before this year, what happens to my contribution room from previous years?
Your unused contribution room has been cumulative since 2009, the year TFSA was created.
If you have never contributed to a TFSA before and were 18 in 2009, you have accumulated $69,500 in contribution room from 2009 to 2020. You can contribute up to this amount in one year.
What types of investments can you have in a TFSA?
You can hold stocks, bonds, mutual funds and even private funds. The TFSA is an investment account and not a product in itself.
What is a "substitute holder" on TFSA application forms?
In the event of your death, your survivor (spouse or common-law partner only) may be named a substitute holder. This person becomes the new account holder, which continues to exist.
The new holder will then be able to keep the two separate TFSAs or transfer the value of the account to the TFSA he already held, without affecting his own contribution room.
Can I open a joint TFSA?
No, only individual accounts are allowed for the TFSA.
However, you can open a TFSA in the name of your spouse and contribute to it in his/her name. Thus, a single-income household can double the savings it shelters from tax.
If I have a 13 year old child and a 17 year old child, is it too late to contribute to an RESP?
For the 13 year old, maybe not since you can still get the government subsidies and even get some from the past.
No subsidies are possible if an RESP is opened when a child is older than 15.
PLANNING AND TAXES
What can I do to attain my financial objectives?
There are several tools to successfully cut spending in order to increase your savings. However, we can also work to ensure that your investment portfolio is optimized. You should be familiar with the returns you have achieved over a long period of time; 5 years for example.
Here is a table that demonstrates the importance of optimizing your portfolio. It gives you the amount you must set aside every year to reach a $1,000,000 portfolio in 30 years.
You can use the calculator to see the results under various scenarios of your choosing.
How can I optimize my taxes when I must start withdrawing from a registered retirement income fund (RRIF) or a life income fund (LIF)?
An RRSP account must be converted to an RRIF (or annuity) in the year of its holder's 71st birthday (otherwise, it is wound up and the total amount is taxable in the year of the wind-up).
Here's how to optimize your taxes in these accounts:
- If you have a spouse younger than you, you can request that the calculation of withdrawals be based on his or her age rather than your own. The amount to be withdrawn each year will therefore be smaller. This election, which must be made at the opening of the RRIF, is irrevocable, even if you divorce or if your spouse dies.
- If you do not use all the money withdrawn, you could put the excess in a tax-free savings account (TFSA).
- If there is money remaining in your RRIF upon your death, the money can be transferred to your spouse without being taxed.
What is the best way to save taxes with our investments?
The best way is to invest in quality companies and keep them for as long as possible. We only pay the tax on the gain at the time of the sale so this strategy is extremely efficient.
Moreover, if we can find companies that are able to reinvest all of their profits in organic growth, we should also save taxes because dividends are a source of taxable income. The organic growth of the company will increase the value of the company and therefore our unrealized capital gain.
Are portfolio management fees income tax deductible?
The Income Tax Act allows a taxpayer to deduct from his revenues (other than commissions) to a firm or an individual whose principal business is to advise on the purchase or sale securities owned by the taxpayer, or for the management of its securities.
Commissions are excluded from the definition of investment advisory fees. They are therefore generally not deductible. However, they increase the adjusted cost base of the investment (ACB), thereby reducing the capital gain (or increasing the capital losses) when the investment is ultimately sold.
Amounts paid for other types of advice, such as financial planning, are not deductible.
No fees are deductible if paid in respect of a registered account (RRSP, RRIF, TFSA, RESP, RDSP).
For Quebec taxes:
Quebec has its own rules in this regard: investment advisory fees can only be deducted against investment income, such as interest income, foreign income, Canadian dividend income and taxable capital gains. The fees not deducted can be accumulated on Schedule N of the Quebec tax return. The accrued fees may be used for investment income earned in the previous three years, or used in respect of any investment income that will be generated in the future (indefinitely), including the taxable capital gains on the resale of a security. If there are any fees not deducted at the individual's death, they may be used in the individual's final tax return, regardless of the type of income.
For taxes at the federal level:
At the federal level, investment advisoryfees are deductible against any type of income.
Why are Principal Protected Notes (PPNs) inefficient when it comes to taxes?
Because the returns you make are considered interest income which is taxed just like normal income. Usually investment returns come from dividends and capital gains which have lower tax consequences.
How are dividends taxed generally?
For a Canadian public company, in general, we get a tax credit for our dividends. The tax credit is calculated by multiplying our dividends by (1 + markup) and then multiplying the amount obtained by the % of the tax credit.
This table is not necessarily up to date.
What is the difference between an Eligible Dividend and a Non-Eligible Dividend?
An eligible dividend is most often a dividend paid on the income of the corporation that is subject to the basic corporate tax rates.
A Non-Eligible Dividend is generally a dividend paid on the income of the corporation that was eligible for the small business deduction.
The dividend tax credit is lower for the eligible dividend because the underlying business probably pays less tax.
What is the best way to withdraw from your RRSP to minimize taxes?
This question probably requires consultation but here are 2 important elements:
1. It may be advantageous to wait to age 65 so you can split your withdrawals with your partner.
2. It may be a good idea to transfer your RRSP to a RRIF because at the federal level, as early as age 65, you can benefit from a tax credit on the first $2,000 withdrawn each year from a RRIF or LIF regardless of your income.
Will I be taxed when I withdraw my shares of Fondaction CSN or the Fonds FTQ when I retire?
Not necessarily because you can transfer your money to an RRSP account.
Are sums received from an inheritance taxable?
No. In Canada, money received from an inheritance is not taxable.
estate will be taxed if the assets of the deceased are inside an RRSP that is disbursed or from the sale of shares that are traded above the cost of purchase.
How much can I withdraw at retirement?
Obviously this depends on your initial amount and your return assumption.
We suggest calling us directly for this question at 450-233-0426.
You may also use the calculator "Retirement Planning" at the bottom of this page as a very general reference for an average case.
Should I transfer a portion of my LRSP to my RRSP every year?
It is often possible to transfer a certain percentage of your locked-in registered retirement savings plan (LRSP) to your RRSP annually. This procedure involves opening a registered retirement income fund (RRIF) and transferring money from your LRSP to your RRIF and then from your RRIF to your RRSP.
The advantage of doing this is that if you keep your LRSP until the age of 71, you are going to have to transfer it to a life income fund (LIF). However, a LIF does not allow you to withdraw more than the annual maximum prescribed by law. A RRIF has no limit for withdrawals.