Managing Your Money

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In the span of a few weeks, our reality has become what seems like the storyline of a science fiction movie. This surrealness we are living is unprecedented, and therefore there is no way to predict many of the uncertainties ahead. We can however look at history to gain clear insight into how resilient we are.  As an economy. As a society. As humans. That resilience and strength has been proven time and time again, through previous unprecedented events. Everyone has their own way of managing emotions and anxiety through stressful situations. Remaining focused on the things we CAN control and letting go of the things that we can’t control, will put us in the best position to manage through this crisis.

We can however look at history to gain clear insight into how resilient we are.  As an economy. As a society. As humans.

Let’s start by focusing on the positives. We know that there will be solutions from a medical side, maybe not tomorrow, but over time we’re going to get there.  We know by having witnessed it in other countries that the curve will flatten. We know that governments are acting as a backstop for the economy. We’ve seen more stimulus rolled out than believed possible. Central banks and governments continue providing more liquidity and generating more economic stimulus to keep markets functioning and soften the massive economic blow that is coming. We know that businesses and individuals will adjust to the new rules of the game. If there is one thing that most successful and resilient businesses are good at, it’s making money, and never failing to adjust to the current environment. This is not going to be the end of society.

Let’s consider the reality. There has been widespread job loss. Some businesses won’t survive. The economy will suffer.  Stock markets are plummeting. And we don’t yet have this virus fully under control. All that being said, right now, most people are focusing on their health, and the health of their families. Those with children are facing new challenges of school and daycare closures. Front line medical workers are facing the biggest test of their lives. So, when we talk about “managing your money”, for many people that becomes a question of survival over the short term. Replacing employment income. Helping adult children who have lost their jobs. And surviving through these next few months of uncertainty. Once the short-term risks are managed, we can refocus on the long-term financial picture and take advantage of current opportunities that can provide a better outcome over time.

confidence amidst the crisisThe markets have taken a serious tumble. Be prepared for disappointing March portfolio statements. There’s going to be some real volatility in the markets, so fasten your seat belts. But remember, markets are resilient, and they will turn around, and eventually attain new highs (see attached chart).  The markets have been through wars, terrorist attacks, viruses and more.  Don’t get me wrong, it’s scary to see the “safe” bank stocks drop 30%, (or over 50% like in 2008), but don’t let fear turn to panic.  I write so often about the importance of proper diversification.  For those who are truly well diversified, they will fare much better through this.  Many of my articles have focused on the importance of holding alternative investments in your portfolio, such as real estate, private equity, private debt, etc.  Today, that is truly paying off, as emotions infiltrated the public markets, and panic ensues. What we’re seeing in the stock markets explains one of the reasons why the Canada Pension Plan and La Caisse de dépôt have diversified so heavily into alternatives and private placements over the past decade.

Once the short-term risks are being managed and immediate health and money worries are under control, we can focus on taking advantage of investment and tax opportunities that exist in this particular market environment. Following the old adage “buy low, sell high”, this is the time to buy if you have cash, and not the time to sell! The truth is we don’t know when the market bottom will be, or if it already has happened. Our gut says no, believing the market will be tested again with bad data and poor earnings. But it is impossible to truly know what is already priced in. Therefore, I suggest buying in gradually, holding back some cash in case of further dips. Keeping in mind though that the stock market is not the economy.  One can surge while the other remains in tatters and vice versa, which we saw last week.

If you’re looking for income, this is a great time to profit from higher dividend yields, being cautious with respect to dividend quality, and the possibility of dividend cuts – not all dividends are created equal.

What to buy depends on your current portfolio, your risk tolerance, and the time frame for that particular investment. There are many opportunities out there in “safe” industries, as well as some of the ones that have been hardest hit.  If you’re looking for income, this is a great time to profit from higher dividend yields, being cautious with respect to dividend quality, and the possibility of dividend cuts – not all dividends are created equal.  It also may be a good time to rebalance your portfolio.  Trimming what has done well or held steady through this crisis and buying what is down. If your portfolio is well diversified there should be good opportunities for rebalancing right now. If you’re managing your own investments, take the time now to assess your own risk exposure and do your research.  If you’re working with an investment advisor, you have likely heard from them. Either way, make rational decisions and be patient. The biggest investment mistakes are usually made in times like this and cause the most long-term damage to retirement portfolios.

From a tax perspective, this is an opportunity to clean up your portfolio, trigger capital losses in order to offset tax on gains and buy something of better quality which is likely at a competitive sale price at the moment.  A great example of this is a client of mine had shares in a company he had previously worked for.  The stock price has had poor performance but pays a decent dividend. This market drop presented the opportunity to dump the shares, benefit from a large capital loss, and buy the parent company of this company, which is better diversified, pays a higher dividend, and is better positioned for growth.  Just beware of the tax rules around this. Your capital loss will be denied if you buy back the same company within 30 days. If you haven’t yet done your 2020 TFSA contribution or you have catch up room, and don’t have cash, this is a great opportunity to sell investments in your non-registered portfolio, potentially triggering a capital loss, then move the money to your TFSA to shelter the gain from future taxes as investments recover. Again, be aware of the capital loss rules to make sure that your tax loss is not denied.

If you’re a retiree or taking regular income out of your RRIF or other savings, it’s very important that you take the steps to protect your capital and minimize losses.  The government is allowing Canadians who have a RRIF to reduce their minimum by 25% for 2020. If you can afford to do this, do it!  It will help to minimize losses in your RRIF portfolio, not to mention reduce your taxable income.  Assuming your portfolio was established using strategic income planning, this is the time to put it to work.  Regular withdrawals coming out of your investments should be shifted to cash, or very low volatile investments to preserve your capital and minimize losses. This is another reason why proper diversification is so important and effective.  If your income is coming from investments that are down, you are likely suffering losses.

So, as most of us self-isolate at home, trying to protect ourselves and others from spreading this dreadful virus, my hat goes off to those who are out there on the front lines.  The hospital workers who are dealing with the sick, the grocery store workers who are keeping us fed, and the other emergency workers who are keeping things running, I thank you. For those of us with nowhere to go, and less to do, this is an opportunity to check things off our “to do” list.  When it comes to your money and finances, aside from the actions I mentioned above, it is a great time to get things in order – everything from reevaluating your spending, to your retirement plan, to your estate plan, and maybe even your advisor. We’re in a position where we have no control over this virus, and the effects of it. So, gaining control over an area of our lives that has been on our to do list can help us to feel good and productive during this challenging time.  Stay safe!

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 25 years of experience working with retirees and pre-retirees. For a second opinion, private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or Lynn.MacNeil@RichardsonGMP.com. Or visit our website at www.EphtimiosMacNeil.com.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

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