The federal budget plan is set to be delivered on March 28th, and that means it’s time for pundits to speculate about potential tax changes. We already know that the First Home Savings Account (FHSA) will be introduced and available at financial institutions some time this year. This account combines the best traits of the RRSP (tax deduction up front), with the best traits of the TFSA (tax-free withdrawal for a qualified home).

But what about other potential tax changes that we seem to talk about every year? 

Capital Gains Inclusion Rate

Changes to the capital gains inclusion rate, currently set at 50%, have been discussed for many years and the federal NDP had proposed an increase to 75% in its previous election platform. Those with a good memory might recall the capital gains inclusion rate was reduced from 75% to 50% back in 2000.

I have no insight into whether or not this will happen, but if you think there’s a good chance the capital gains inclusion rate will increase then I suppose you have a short window to trigger a capital gain in your taxable account.

Also, there’s a lot of confusion around the capital gains inclusion rate because we see big numbers like 50% or 75% thrown around. This doesn’t mean that you pay a 50% tax on a capital gain. It means that 50% of the gain is treated as taxable income at your highest marginal rate.

For example, if you have an income of $100,000 in Alberta then your marginal tax rate is 30.50%. Let’s say you trigger a capital gain in your taxable investment account, selling shares of your S&P 500 index fund for $30,000 more than you paid for it. $15,000 of that gain (50%) would be taxable and added to your income, giving you a total taxable income of $115,000. 

In Alberta, income above $106,718 is taxed at 36%. That means you’ll pay taxes of $2,981.52 on the income between $106,718 and $115,000 ($8,282 x 36%), plus taxes of $2,048.69 on the income between $100,000 and $106,717 ($6,717 x 30.50%), for a total tax of $5,030.21 on that $30,000 capital gain. Not too bad.

Top Federal Tax Bracket 

Another federal NDP platform policy would see the top federal tax rate increase from 33% to 35%. Currently, that rate kicks-in for income above $235,675.

This would push the combined top provincial and federal marginal tax rates to about 56% in provinces like B.C., Quebec, and Ontario.

A similar proposal was recently announced by U.S. President Joe Biden when he called for the top federal rate to increase by 2.6%.

RRIF Age and Minimum Withdrawals

Industry groups are lobbying the federal government to raise the mandatory RRIF conversion age and delay minimum withdrawal requirements to better reflect a lower interest rate and return environment and reduce the risk that Canadians might outlive their savings.

Note that a proposal is being reviewed by the Department of Finance but they are not expected to report its findings and recommendations until June.

The Investment Industry Association of Canada argued:

“The existing rules date back to 1992 when interest rates were higher and seniors were not living as long. Today, it’s unlikely real returns on safe investments will keep pace with the withdrawals.”

While I agree that we should review and modernize programs from time-to-time, a proposal like this stands to benefit wealthy individuals the most. The concern about minimum mandatory RRIF withdrawals triggering OAS clawbacks sounds very much like a first-world problem, and so I don’t suspect this proposal will gain much traction with a government that’s looking for more tax revenue from the wealthy, not less.

Finance professor Moshe Milevsky suggested an interesting alternative: repealing the mandatory RRIF withdrawal, and instead taxing the entire holdings at a rate of 1% every year, following the system that Australia uses.

This Week’s Recap:

I wrote about the five year anniversary of Vanguard’s groundbreaking asset allocation ETFs. An absolute game changer for DIY investors.

Earlier this week I shared a detailed post about OAS payments and how much you can expect to get from Old Age Security. Interestingly, this article went absolutely viral with 20x more views than a new article would normally receive. It got picked up by Google news, and I suspect a lot of seniors have also been searching for facts about OAS due to a now repealed change that was supposed the take effect April 1, 2023 (raising the minimum age from 65 to 67). This is not happening, so if you’re turning 65 this year you can confidently expect to receive your OAS if you plan to take it.

Promo of the Week:

With Air Miles making news for all of the wrong reasons (again), many readers have reached out looking for rewards credit card alternatives.

The best credit card depends on your shopping habits and what you’re looking for in terms of rewards. For me, the American Express Cobalt Card is my go-to card for groceries, dining out, and take-out. You get 5x points on “eats and drinks” and those points can be transferred to Aeroplan on a 1:1 basis where you can redeem for flight rewards at a rate of ~2 cents per mile. 

That means you’re getting a mouth-watering 10% back on your credit card spending for that particular category.

Sign up for the Amex Cobalt card and you can earn up to 30,000 bonus points (2,500 Membership Rewards points per month that you spend $500 in your first year as a new Cobalt cardmember). That means if you spend $500 per month in the “eats and drinks” category, you’ll earn 2,500 points per month on the spending, plus 2,500 bonus points per month, for a total of 60,000 points for the year.

Transfer those 60,000 points to Aeroplan and redeem them for a flight reward at 2 cents per mile. That’s like getting a $1,200 value.

Weekend Reading:

Rob McLister warns that when your bank suggests you lock in your variable rate mortgage, it has an angle:

“If you’re a mortgage shopper who can qualify for any term, the message is simple. Don’t let anyone talk you into a 5-year fixed at today’s rates,” says McLister.

Dan Hallett explains why his investment firm avoided trendy investment themes like cannabis, bitcoin, and covered call writing, and has no regrets.

The Millionaire Teacher Andrew Hallam unveils the surprising key to longevity in retirement. A must read.

Of Dollars and Data blogger Nick Maggiulli explains why concentration is not your friend when it comes to investing.

Speaking of diversification, PWL Capital’s Ben Felix explains why international diversification is crucial, both theoretically and empirically, to sensible portfolio construction:

Tim Cestnick shares a cautionary tale on choosing your RRSP or RRIF beneficiaries carefully.

Michael James on Money discusses the benefits of giving with a warm hand instead of leaving a larger inheritance in your estate.

With yields at their highest levels in many years, investors may be wondering whether it makes sense to invest in stocks, bonds or CDs (GICs to us north of the border). Here’s a great discussion on how to decide.

Related, here’s Andrew Hallam again explaining why savings accounts can put your retirement money at risk.

An 85-year Harvard study on happiness found the No. 1 retirement challenge that ‘no one talks about’:

“When it comes to retirement, we often stress about things like financial concerns, health problems and caregiving. But people who fare the best in retirement find ways to cultivate connections. And yet, almost no one talks about the importance of developing new sources of meaning and purpose.”

Here’s Jason Heath answering a question about starting to draw down your investments in retirement – should you sell your non-registered or TFSA stocks, or both?

A basic understanding of bond math can help investors stay the course. Here’s what to expect from bond total returns when interest rates rise.

Frugal, or miserly? Why is it that when rich folks are tightfisted, people call them eccentric, but—if you aren’t rich—people tag you as cheap?

Should the minimum age to receive CPP (currently age 60) be increased? Some arguments for and against.

Wondering where to get your rewards points? Barry Choi compares Canada’s grocery store loyalty programs.

Finally, an excellent post-mortem on the Silicon Valley Bank debacle – credit risk happens fast.

Have a great weekend, everyone!

It has been five years since Vanguard introduced the first asset allocation or “all-in-one” ETFs in Canada. Simply put, these one-ticket solutions have been an absolute game-changer for do-it-yourself investors.

I’m on record to say that if investing has been solved with low-cost index funds, then investing complexity has been solved by using a single asset allocation ETF. Yes, it can be that easy.

I put my money where my mouth is by holding Vanguard’s All Equity ETF (VEQT) in my RRSP, TFSA, LIRA, and corporate investing account. Many of my financial planning clients also hold asset allocation ETFs in their portfolios.

Related: How I Invest My Own Money

It started back in 2018 with the launch of three asset allocation ETFs; Vanguard’s Conservative ETF Portfolio (VCNS), Vanguard’s Balanced ETF Portfolio (VBAL), and Vanguard’s Growth ETF Portfolio (VGRO).

Vanguard later added an all-equity version (VEQT), a conservative income ETF (VCIP), and the retirement income ETF (VRIF) to complete what it calls the full range of risk profiles for investors and retirees.

In the last five years, Vanguard’s asset allocation ETFs have grown to almost $9 billion in assets under management – making it one of the fastest-growing investment products in Canada. VGRO is the most popular with $3.8 billion in assets, making it the 17th largest of the 1,000+ ETFs in Canada.

There’s a reason why “just buy VGRO” is the mantra for many enthusiastic DIY investors on Reddit.

I spoke with Sal D’Angelo, Head of Products for Vanguard Americas, about the impact Vanguard’s asset allocation ETFs have had on the Canadian investment landscape.

He said the company felt good about launching a brand new ETF category, given the appetite for balanced funds in Canada.

“Approximately half of the $1.89 trillion in mutual fund assets are held in balanced funds,” said D’Angelo.

The value proposition for asset allocation ETFs have certainly been enticing enough to (slightly) disrupt the balanced mutual fund market. After all, why pay nearly 2% MER for a balanced mutual fund when you could hold a balanced ETF for nearly 1/10th of the cost?

“We’ve definitely seen bigger growth than expected over the past five years,” said D’Angelo.

The Vanguard Effect on Asset Allocation ETFs

Imitation is the sincerest form of flattery, but nothing new for Vanguard. The so-called ‘Vanguard effect’ is real. Shortly after launching VCNS, VBAL, and VGRO many other asset managers launched their own suite of asset allocation ETFs.

The category is booming, with industry assets under management now at ~$14 billion dollars and growing. While that represents just over 4% of the ETF industry, the category is generating between 5-10% of industry flows (new money) over the past three years.

“We’re flattered that others have emulated the product,” said D’Angelo.

Vanguard believes, the more low-cost, simple-to-understand and broadly diversified products there are available, the better for Canadian investors.

Five years represents a significant milestone when it comes to benchmarking performance against its category peers, and Mr. D’Angelo was eager to highlight the performance of Vanguard’s asset allocation ETFs.

• VGRO beat 92% of category peers over 5yrs, 85% for VBAL, and 53% for VCNS.
• VGRO and VBAL were just awarded a FundGrade A+ Award in 2022, which is awarded for funds that demonstrated outstanding risk-adjusted performance. Only about 6% of eligible funds available in Canada win this prestigious award.
• VEQT was also a winner of the FundGrade A+ Award but was not part of the original three ETFs that launched back in 2018.

Is the 60/40 Portfolio Dead? Nope

While on the subject of performance, I asked Mr. D’Angelo about the 60/40 portfolio given its historically bad year in 2022.

He said the 60/40 portfolio is alive and strong and will continue to serve investors well over the long term.

“Past research has shown that these types of difficult years happen occasionally, but the benefit is that long-term valuations for stocks and bonds are attractive moving forward,” said D’Angelo.

• Stock-bond declines are not long-lasting: Looking back to 1976, simultaneous losses in both U.S. stocks and bonds have only occurred 0.4% of the time, on a 1-year rolling return basis.
• The 60/40 portfolio was negative only 14% of the time on a 1-year basis and 0.6% on a 5-year rolling return basis.
• The stock-bond correlation remains negative in the long-term – Our study of 60-day and 24-month stock-bonds rolling correlations from 1992 to 2022 suggests that over the long-term, the correlation between stocks and bonds remains negative. That said, long-term inflation is one of the determinants of correlation between the two asset classes.

Mr. D’Angelo says that bonds will continue to act as a ballast to the portfolio:

“High-quality bonds reduce the impact of a market downturn in a multi-asset portfolio, as seen in 2008 and more recently in 2020.”

Also, more than 90% of bonds’ total return is generated by coupons, not capital appreciation.  In a rising interest rate scenario, negative returns generated by price declines can be more than offset by higher coupons if an investor’s time horizon is longer than their bond portfolio duration.

Finally, current interest rates / coupons are favourable, with high-quality bonds yielding 4-6%. 

I agree with this assessment and remind VBAL investors that the balanced fund had outstanding returns from 2019 to 2021 before suffering losses in 2022:

• 2019 – 14.81%
• 2020 – 10.20%
• 2021 – 10.29%
• 2022 – (-11.45%)

“Vanguard research expects average annual returns of about 7% for a 60/40 balanced portfolio over the next 10 years,” said D’Angelo.

Final Thoughts

You won’t find a bigger fan of asset allocation ETFs than me. I invest my own money in VEQT. Many of my financial planning clients use asset allocation ETFs in their portfolios. Heck, the entire premise of my DIY Investing video series centres around how easy it is to hold a single asset allocation ETF so you can move on with your life.

I’m grateful to Vanguard for launching this category and making it easy for DIY investors to manage their own low-cost, risk-appropriate, and globally diversified portfolio.

The good news is, after five years, we’re still in the early innings of adoption for asset allocation ETFs. I fully believe that more and more investors and advisors will understand the importance of cost on investment returns over the long term and will continue to adopt low-cost asset allocation ETFs in their portfolios.

I’ve been looking for a phrase that captures the odd behaviour that investors exhibit when they change strategies based on current market conditions. Ben Carlson at A Wealth of Common Sense neatly summed up this behaviour as investors always fighting the last battle. It’s perfect:

“Not every investor does this but there is a tendency to invest money into the speculative stuff only after it rockets higher during a bull market and invest money into the defensive stuff only after it protects capital during a bear market.”

Investors pour money into the latest fads long after the incredible returns have been made. This happens at the micro level with individual stocks and sectors (think Tesla, or cannabis). It happens with star fund managers and thematic ETFs (Cathie Wood’s ARK funds). It happens when certain investment styles outperform (like the large-cap growth, technology-heavy NASDAQ), or a country or region outperforms (like the S&P 500). It happens with speculative investments (like crypto and NFTs).

I get why investors fall for the hype. There’s a potential paradigm shift or new normal, and they don’t want to get left behind. But it’s classic performance chasing that never ends well. 

Out-sized returns don’t last forever, so when the bubble bursts, investors who loaded up on risky assets inevitably bailed out and looked for safety.

That reckoning came in 2022. The riskier the asset (or frothier the price), the harder it fell (crypto, thematics, tech stocks, NASDAQ, S&P 500). 

Investors who ignored their risk tolerance from 2019-2022 have suddenly become ultra-conservative, loading up on short-term GICs and cash while they wait for the market to settle down (whatever that means).

On the flip side, retirees who saw the bond portion of their portfolios get hammered last year are moving into dividend stocks and the latest income fad, covered-call ETFs.

The problem is we’re always fighting the last battle. We see last year’s best performer and decide to follow that strategy. But that strategy may have only worked in that specific situation for that specific time period. You can’t go back in time and invest with perfect hindsight. You need to invest with future expectations in mind.

And because we don’t have a crystal ball to see how this all plays out, we need to follow a risk appropriate strategy that we can live with in good times and bad. That means having a bit of FOMO when other strategies are performing better, and having some degree of humility when your investments outperform.

It’s that long-term approach that leads to better, more reliable outcomes for investors. Not constantly fighting the last bull or bear market.

This Week’s Recap:

I’ve received a lot of great feedback from my post last week on the best uses for your TFSA. It’s nice to hear that so many of you acknowledge the many uses of a TFSA (not just to leave a pot of tax-free gold in your estate).

Many thanks to Rob Carrick for highlighting eight ways retirees can save on tax in his latest Carrick on Money newsletter.

Our new house build is coming along nicely. The cabinets were installed this week, and next week is the first round of finishing carpentry. We don’t have a possession date yet, but now it’s looking like mid-April.

Meanwhile, all is quiet on the home selling front. Hopefully with a conditional pause on rate hikes and some good news on inflation we’ll start to see some more activity in the coming month or so.

Promo of the Week:

If you’re looking to start DIY investing with ETFs, or looking to break up with your expensive mutual fund advisor, then you need to check out my DIY Investing Made Easy course.

You’ll find videos explaining why investing has been solved with low cost ETFs, and why investing complexity has been solved by using a single asset allocation ETF. You’ll learn all about these asset allocation ETFs, including which one is the most risk appropriate for you.

I’ll explain which online broker makes the most sense for your situation, and I’ll show you platform-specific videos on how to open your account, add new funds, transfer existing funds, and how to buy and sell an ETF.

You’ll have all the resources you need to become a successful DIY investor, including access to me by email if you need any extra guidance.

Weekend Reading:

A few of you asked what podcasts I listen to regularly. Here’s a list of my favourites right now:

• Rational Reminder – hosted by Ben Felix and Cameron Passmore of PWL Capital, this is hands-down the best podcast for investing and financial decision making.
• I Will Teach You To Be Rich – hosted by Ramit Sethi, this is a look into the lives of couples and money psychology. Every episode is fascinating.
• Cautionary Tales – hosted by Tim Harford, who has the best podcast voice in the business. Wonderful story telling, and there’s always a great lesson in each episode.
• Animal Spirits – hosted by Michael Batnick and Ben Carlson of Ritholtz Wealth Management. They’ve got a great formula to keep you up-to-date on what’s happening in the market and in their lives,
• Money Feels – hosted by Bridget Casey and Alyssa Davies, this is personal finance talk without the usual guilt or shame.
• Stress Test – hosted by Rob Carrick and Roma Luciw, this personal finance podcast looks at the real issues facing young Canadians today.

Speaking of Ben Carlson, congrats to Ben on 10 years of blogging at A Wealth of Common Sense. That’s a decade of consistently posting every weekday – absolutely incredible!

Where do millionaires keep their money? Of Dollars and Data blogger Nick Maggiulli says it’s not where you think.

The Measure of a Plan has updated the investment returns by asset class from 2010-2022. The best (or least bad!) asset in 2022 was short-term treasury bills at -5.2%. The worst? REITs at -31.1%.

Are Canadian dividend funds all they’re cracked up to be? Morningstar dives into the data and says the results are mixed:

“On a trailing 15-year basis, investors in dividend funds have ended up more or less in the same spot as those invested in Canadian equity funds.”

This is what I found in my investing multi-verse of madness post – I could have achieved a similar return had I stuck with my Canadian dividend stocks, but I would have done a heck of a lot more work to get the same outcome.

If 2022 wasn’t the worst year for investors, then when was? Millionaire Teacher Andrew Hallam has the answer.  

Tim Kiladze on the high-yield, but defensive ETFs that Canadians can’t get enough of: Covered-call funds. (subs)

How to make the most of your investments in retirement? Why a long-term, cash-flow driven approach to your retirement portfolio is key to success.

Finally, here’s an opinion piece on the cruel and unusual torture of doing your own taxes.

Have a great weekend, everyone!