Growing Your Wealth Your Way

With Life Aligned Investing/ACPI, we are able to provide a wide variety of investment choices including mutual funds, ETFs, stocks and bonds.

We are an independent investment service. The investment strategies we develop with you are not tied to any directive or incentive to promote specific products. We assist you to design a portfolio that aligns with your objectives.

Making sense of rates of return

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Financial Services has an abundance of acronyms and glossary terms that can be downright confusing. Even something as seemingly straightforward as the rate of return isn’t without a certain level of complexity.

The most important consideration is how you intend to use the information.

  1. Are you assessing the performance of the portfolio manager?
  2. Are you evaluating your personal rate of return?
  3. Are you most interested in long-term performance, looking for shorter-term buying opportunities, or assessing whether it’s time to take some profits?

There are two commonly used methods for measuring the rate of return of a portfolio: time-weighted vs money-weighted. Both are informative depending on your purpose.

When you look at the profile of a specific investment fund, you are seeing the time-weighted return. We often use data provided by independent research firms such as Morningstar and Fundata to evaluate funds (managed portfolios).

When you look at your own portfolio summary, you are seeing the money-weighted return. We always report net of fees so it is the true measure of your investment performance taking into consideration related costs.

See the following examples to understand the differences if you’d like to delve further.


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Determining which portfolio managers you want to have managing your money and when you want to invest are informed by these types of calculations.

Hope this is helpful if you are puzzled by different rate of return calculations. If you have any questions, you can always call us.


*Graphics adapted from CI Investments’ “Making Sense of Your Investment Performance”

“And how will you be paying?”

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Black Monday Headlines The New Your Times

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October 19th marked the thirtieth year since that famous day in 1987, when the US S&P 500 Index declined over 20% in one day. It’s known as Black Monday. I was just starting my career in financial services. I remember the news coverage and the total panic. This definitely wasn’t what I had signed up for, but it was a valuable lesson in the power of investor psychology.

If you want to learn more about that prominent day in the history of investing, see the New York Times article by Robert Schiller who studied investors’ behaviour following Black Monday. (Schiller won a Nobel Memorial Prize in Economic Sciences in 2013.)

Much has changed in finance in those thirty years since Black Monday.

We now have financial technology (FinTech) automating and accelerating the pace of money flows in the capital markets. There are thousands of publicly traded individual securities and managed portfolios (mutual funds, segregated funds, private investment pools, exchange traded funds), and a plethora of other hybrid investment vehicles that are competing for your attention.

FinTech has literally transformed our day-to-day banking experience. Remember when you saw your first automated banking machine? Pay bills online, take a picture of a cheque and send it electronically to your bank account? Really?? Now these activities are commonplace, part of our banking routine.

If you take a look at the industry updates we’ve posted this year (we only post a few of those most relevant), you can see that FinTech along with regulatory reform are causing enormous disruption in the financial services sector. With the invention of cryptocurrencies FinTech promises even more dramatic change aheadThese virtual currencies have the potential to replace the currencies of individual countries — and the banking system as we know it!

BitcoinThe first such digital currency was Bitcoin, invented in 2008 as a global means of payment. Transactions are done through peer to peer networks without the need of a bank, making it the first decentralized digital currency. In spite of the graphic, this isn’t a physical coin that you can put in your pocket. Bitcoin is virtual.

Speculators have been captivated by this innovation. With high volatility in the price of a Bitcoin (in USD up this year from $967.07 on Jan 1 to $6,400 Oct 31/17), you can imagine that fortunes have been made and lost already trading on this financial technology. Bitcoin could become the cyber equivalent of gold. It could also be a perfect example of a FinTech mania and go the way of the tulip bulbs in Holland (Tulip Mania).

Maybe other competing cryptocurrencies will prevail – Ethereum, or Dream, or Ripple… We’ll keep you posted on developments. For now Bitcoin is in the lead.

“And how will you be paying?” Someday, maybe sooner than you think, your reply just might be … “in Bitcoin please”.

As we move into the final weeks of 2017, take the time to review your current financial picture. Make sure everything is organized before year-end. Even if it’s not bitcoin, you’ll need some kind of coin to keep ahead of your taxes and everything else that goes into the business of life.

If you have any questions on your overall life plan, your portfolio or tax position, please call us. We’d be glad to hear from you.

The Pendulum Swings

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Whether you’re heartened or disheartened by the election of Donald Trump as President of the United States, one thing is clear – the pendulum has swung hard to the right. It’s not easy to sift through the conflicting policy statements to discern what the Trump anti-establishment, pro-business position actually is. He was elected on promises of –

  • big tax cuts (in corporate, personal, estate, and capital gains),
  • deregulation of health care, energy, and financial services,
  • renegotiation of trade agreements, and
  • fiscal stimulus (federal support for infrastructure projects).

Actions taken to date suggest a change agenda that extends far beyond the borders of the U.S.

How Canadians will be affected remains to be seen. The fear of a trade war with the United States has been lessened by the apparently cordial meeting this week between “Joe” Trudeau and Trump.

The financial markets have responded enthusiastically to the election of Trump, in spite of social and geopolitical concerns. The markets have been on a sugar high with the prospect of massive tax reforms, deregulation, and infrastructure spending. It’s great to get a surge in the markets, but remember the role of diversification in achieving solid, risk-adjusted returns over the long-term. For a reality check note the following guidelines published by the Financial Planning Standards Council (FPSC) in 2016 in terms of portfolio performance expectations over the long haul.

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To view the full FPSC Projection Assumption Guidelines report, click here.

Change is in the Air

While the U.S. Administration has promised to lighten the regulatory burden on financial services, sweeping reforms here in Canada are geared toward tightening the regulations. These are some of the major changes we’re seeing.

1. Consolidation within the investment industry and within the product offerings of those investment firms.

A recent example of this trend is the sale of Scotiabank’s subsidiary, HollisWealth, to IA Financial Group. IA Financial is also the parent company of our dealer, FundEX Investments Inc. Through a series of acquisitions IA Financial has become prominent in wealth management in Canada with close to $800 billion of assets under administration (including $11 billion that advisors associated with FundEX oversee on their clients’ behalf).

It’s important to have a broad array of investment choices, but with over 53,000 investments tracked on the Fundata research platform it’s clear we have way more than we need. Some consolidation is certainly welcome.

2. Lower fees on managed portfolios, including all types of mutual funds, segregated funds, exchange-traded funds, private investment pools, private wealth programs.

Competition is increasing. Investment firms are tightening their belts. To obtain a competitive edge they are rationalizing their offerings and launching new “preferred” pricing options, private investment pools, and private wealth programs — all more or less synonymous with lower management fees.

3. Better packaging of information for investors on investment risk, returns and costs  

For each of their fund offerings, investment firms are now required annually to publish a concise, easily understood document called Fund Facts. You may have already received some of these documents.

4. Transparency on the cost of advice and service 

On your December 2016 statements you will see additional information regarding the fees you paid to FundEX and Fraser & Partners for advice and service. We welcome the greater transparency on fees.

There is a debate in the industry over how advisors should be compensated – embedded fees (bundled within the cost of the investment) versus fee-for-service (FFS) (unbundled from the specific investments held in your portfolio). Rather than restrict the choices investors have when it comes to method of payment, I’d prefer to see the regulators raise the bar in terms of practice standards and let investors find the service that’s right for them.

The challenge in relying on practice standards lies in the difficulty of measuring success in a financial advisory relationship. Our work is not just transactional. We don’t simply meet with you and pitch the product that’s the flavour of the month.

  1. We strive to get to know you as a whole person – your values, stage of life, family, time horizon, risk tolerance, personal financial resources, tax, hopes and dreams, your mindset about money and resilience in the face of change.
  2. We bring our knowledge, expertise, and vigilance regarding regulatory, market analysis and product analysis, so that you get the best possible benefit from what’s available to you along the way.

From my perspective, advising is values-based and personal. It isn’t just a few calculators thrown up on the monitor to determine your financial destiny. It is the human element intertwined with technical expertise that matters. We may not always be popular because we’re not always going to tell you what you want to hear. You can depend on us to voice what is real and also to explore a range of possibilities from a place of understanding.

We’re gradually transitioning to a fee-for-service model, which represents an unbundling of the cost of investment advice from the specific investments in your portfolio. There are pros and cons to FFS. It won’t be worthwhile for all of our clients to make the change, but it’s an option for everyone.

Key benefits in using a fee-for-service structure:  
1) tax treatment – the fees on open/non-registered portfolios are tax-deductible (all or in part, depending on the situation);
2) the fee-for-service fund versions in most cases are somewhat less expensive and you can enjoy a small saving on the cost of portfolio management – click here to view an actual comparison;
3) no real or perceived conflict of interest;
4) fees can be negotiated directly between the advisor and the investor (within limits placed by the firm).

Other things to think about: 
1) tax laws can change – the carrying charges for investment advice are going to be scrutinized (remember when you could deduct safety deposit fees?);
2) there is ample research to demonstrate that financial planning pays off; clients may look at the cost of the advice without considering the benefits gained from the relationship with an independent advisory team;
3) clients could end up paying more when the fees are negotiable than when they are fixed and embedded;
4) some investors may no longer have access to an independent advisory service; it may not be financially viable for the advisor to work with clients who have small amounts to invest.

The following table compares embedded fees vs fee-for-service (FFS) with an unbundled advisory fee (assuming 1% in this example) on a $100,000 investment. We compared 4 of Fraser & Partners top mutual fund holdings with different characteristics to illustrate cost differences based on the type of fund.

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“When the winds of change blow, some people build walls and others build windmills.” ~Chinese proverb

In an environment of accelerating change some things stay the same – including our dedication to helping you navigate the complexities of life along the way.

Let us know if you have any questions or concerns.

New Rules for Corporate Class Mutual Funds and How They Affect You

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New Deadline on Changes to Taxation on Corporate ClassAt the beginning of the year, we hosted round table discussions to help you set your planning agenda for 2016. We discussed income tax changes being implemented by the federal Department of Finance and the potential impact on investment planning.

With the change in tax rules, it is more important than ever to think strategically about the type of income you will earn on your investments and to then position your portfolio accordingly. Initially, the government intended to change the tax treatment of corporate class mutual funds effective September 30, 2016. They have since extended the deadline to January 1, 2017 – a welcome reprieve in a year of many changes in the financial sector. 

Tax Treatment of Income Earned on Your Investments

You are aware that interest, dividends, and capital gains all receive different tax treatments. Interest earned in non-registered accounts is treated the same as employment income. For example, if your combined federal and provincial marginal tax rate is 37.90%, you pay 37.90% tax on all interest earned.

Capital gains are treated differently. A capital gain happens when you sell or transfer capital property, such as stocks, mutual funds or real estate at a price higher than you paid. For example, if you bought $10,000 of units of Investment Fund A and sold those units two years later for $15,000, you have a capital gain of $5,000. Although there are a few exceptions, in most cases this gain is taxable, but you only have to declare for tax purposes only 50% of the actual gain. In this case, you pay tax on the $2,500, not the entire $5,000. The result is you pay less tax on capital gains than on interest.

In the chart below, you can see that if you are a Manitoba resident and your taxable income in 2016 will be between $67,000 and $90,563, it will be more tax efficient if you earn capital gains (18.95% marginal tax) rather than eligible Canadian dividends (20.53% marginal tax).


Manitoba Personal Income Tax Brackets and Tax Rates

For investors who use mutual funds, one way to reduce the tax burden is to invest non-registered money in investment funds that are held within a corporate class structure. Mutual funds can be organized as trusts or corporations.

Historically, corporate class mutual funds have had two main benefits:

  1. Less investment income to be reported annually as taxable income. This is because corporate class funds usually reinvest their interest and dividend income or use this income to pay fund expenses.
  2. No capital gain or loss triggered as a result of switches between different fund classes within the corporation. For example, if you have money invested in class A units of Corporate Fund X, at this time you can switch some or all of that money to class B units of Corporate Fund X without triggering a taxable gain or loss.

If you would like more information about capital gains and how they are calculated, visit CRA’s website:

Changes to Tax Treatment of Corporate Class Mutual Funds

The federal government has decided switching between different classes within the same mutual fund corporation will now be considered a taxable event. If you have a gain in class A fund, and you want to rebalance your portfolio by moving some of this money to class B, you will have to declare that capital gain.

Originally, this change was to take effect in October 2016. The federal government has moved the date to January 1, 2017. The old rules still apply for the remainder of this year.

There will only be two exceptions to this new rule. If the change in class happens because the fund itself restructures and converts all class A shares to class B, there is no tax implication for the investor. Also, if you move from the same class of fund but into a different series, there is no tax implication. The difference between one series and the next is usually the fee structure. The government won’t penalize investors for trying to have the exact same funds at a lower fee.

According to the Globe and Mail, “Approximately $120 billion of industry assets under management (AUM) are in corporate class funds, representing 10% of total mutual fund assets in Canada.” Therefore, many people will be affected by this change.

Review Your Non-Registered Investments with Your Advisor Before December 31, 2016

While corporate class funds still offer the advantage of using interest or dividends to offset fund expenses, you won’t be able to rebalance your portfolio free of tax implications come 2017. It will be critical for you and your advisor to review your non-registered investment funds so you can make appropriate changes before the new legislation comes into effect. In light of this change, you will need to think more strategically about how to construct your non-registered portfolio and how to manage it tax efficiently.

We’ve been working hard over the past few months to evaluate the great number of changes that investment firms have been making in their offerings. In studying these trends we’ve been able to confirm strategies that will enable you to position well for the years ahead. If you have non-registered investments, please contact us to schedule an appointment before the end of the year.

Carpe Diem! Volatility-not so bad after all

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Time_800pxRecent weeks in the financial markets have been dramatic. On August 10th the People’s Bank of China devalued the Chinese renminbi (yuan) and this unleashed an irrational flood of panic selling. While you may not share this sentiment, I have to confess I was glad to see some volatility returning to the financial markets. Typically that’s the time when your portfolio managers shine! It’s also a time when we at Fraser & Partners apply additional specific criteria in monitoring the investments you own. What we see will either confirm or prompt us to re-evaluate the investments we are recommending.

Every year we have events that trigger stronger than normal waves of buying or selling within the markets. This is a normal part of investing.

This is also when the stampede starts. It’s often referred to as “the herd mentality” – stronger than ever in this digital world of instant communications. Those who study finance understand that economic factors account for only 17% of stock market increases or declines. What about the other 83%? It’s the “herd” – the human factor.

Your portfolio managers are trained to seize opportunities during a stampede, whether it’s fueled by greed and optimism or fear and pessimism. We’re seeing lots of pessimism right now in terms of the energy sector and also emerging markets.

Have we hit the point of maximum pessimism? Take a look at the graphic below and watch for the signs of capitulation and despondency. Although it may seem counter intuitive, it is at this point in the cycle of market emotions that a value-oriented portfolio manager will be able to acquire high-quality investments with the greatest margin of safety.

Market Emotions Diagram

On August 24th I received an email from a portfolio manager. Included was a list of the top 10 holdings in one of their equity funds along with the price swings that had occurred in the share value of each of the 10 companies in one day. JPMorgan Chase & Co. was on the list. During the day this stock had opened at $50.07 per share and closed at $62.92, a change of 26%. If the manager was able to buy close to the low and sell close to the high, then it was a good day. By taking advantage of such price swings throughout the trading day, that manager was able to capitalize on the volatility for the benefit of investors. If the manager had a larger than normal cash position that day, even better!

When we evaluate investments during a period of volatility, we study the level of cash in the investment funds. For example, when we look at three of the equity funds that our clients own, we see that Equity Fund #1 had a cash level of 12% at the end of July; Equity Fund #2 had almost 40% and Equity Fund #3 had less than 5%. The third investment was already on our watch list because of inconsistent performance in recent periods. Based on our experience we do not expect that this fund will be able to provide as strong a return relative to the other two. We’re not naming specific investments in this blog, but if you own Equity Fund #3, over the next few weeks we will be contacting you to recommend a switch to a stronger holding.

Even if there is more decline ahead, it’s time to put your cash into the hands of the portfolio managers. They have a disciplined process. They know how to assess the value of the companies in which they are investing. They will be using this period of heightened volatility to strengthen the portfolio for strong long-term performance.

If you haven’t already done so, in keeping with your investment strategy, make your 2015 contribution now to your TFSA, RRSP, RESP. Let the portfolio managers take it from here. Call or send an email to your advisor to make arrangements.

Worry less and live more

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Live LifeOne of our objectives is to help you worry less and live more, especially when it comes to your financial life plan and your investments. How can you possibly do that when you hear about Canadian soldiers killed while performing their duties on home soil? Or when we learn about the unthinkable violence of rebels in the Ukraine and the Islamic terrorists in the Middle East? Or when we see photos of Ebola sufferers in Africa? This all contributes to a growing uneasiness. It’s important not to allow this to overshadow your life or negatively affect your decision-making, especially pertaining to your investments.

Recently we’ve been noticing more concern over volatility in the financial markets, more fear about market declines, and we are having more discussions about when/how to “time the market”.

How can you worry less?

  • Turn off the news!
  • Focus on those things in your life that you can control.
  • Reaffirm your values – what is truly important to you? what do you want to accomplish in your life?
  • Clarify your investment philosophy.


How can you live more?

  • Turn on some music.
  • Spend time with family and friends.
  • Book a trip to Maui.
  • Brew a cup of java (or green tea if that’s your choice), sit down in your favourite oversized chair, put your feet up and take a few minutes to read this article published by Edgepoint Wealth. This is from their 3rd quarter, 2014 commentary, written by portfolio manager, Geoff MacDonald. There is a lot of investment wisdom in this article. I encourage you to take the time to study Geoff’s views and make sure you aren’t being influenced by the myriad of sales and product pitches that turn individuals into short-term speculators (gamblers) rather than long-term investors.

Geoff MacDonald summarizes the outcomes of a study published by Charles Schwab & Co. in December, 2013.The study presents the experience of 5 hypothetical long-term investors, who each received $2,000 at the beginning of each year for 20 years ending in 2012. (Excerpt from page 3) 

Peter Perfect was the perfect market timer. He invested in the market every year at the lowest monthly close. Each year he was somehow able to determine this date.

Ashley Action simply invested her money as soon as she received it.

Matthew Monthly divided his $2,000 into 12 equal portions each year and invested at the beginning of each month. In other words, he was the dollar-cost averager.

Rosie Rotten had horrible luck. She invested her $2,000 each year at the market’s peak. She happened to hit the market high every year for 20 years!

Larry Linger left his money in cash every year, always thinking there’d be a better opportunity to invest in the future when stock prices were lower.

Read More: 2014 Q3 – EdgePoint Commentary

Is it time to rebalance your portfolio?

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Rebalancing your portfolioWith North American stock market indices hitting record highs, you may be wondering if you should be taking any action on your investments. The answer is likely yes! After such strong recent gains in equities (growth assets), your portfolio may look quite lopsided. Time to rebalance!
In this blog I am going to highlight the process we use to establish your target asset allocation and to organize and maintain proper diversification in your portfolio.

When you receive your portfolio summary for June 30, you probably will see a greater value on the bottom line than you did at the end of the last quarter. The investments in your portfolio that contributed most to that increase, however, may not be the same ones that outperformed last quarter or last year. That’s because a well-constructed portfolio is comprised of different classes of assets and each of these classes will outperform (and underperform) at different times in response to different conditions in the business cycle.

When you initially established your investment plan, you did so as part of a larger planning process. Your strategy probably called for a specific rate of return in order to fulfill “the grand vision”. Assessment of your risk tolerance using the FinaMetrica questionnaire provided a preferred mix of defensive and growth assets. Based on this, in order to achieve your desired rate of return – with an acceptable amount of risk, we carefully constructed an asset allocation plan.

The following chart illustrates how your risk tolerance score from the FinaMetrica questionnaire helps to establish parameters for your portfolio. In the example below, a risk score of less than 51 means that a portfolio with 70% growth assets would be too risky for you; you would not be comfortable enough with the risk to stick to the investment plan, even if you believed the long-term gain would be greater. On the other hand, a risk score of greater than 78 would suggest that you would be agitated about missing out on the potential for greater growth. The comfort zone for an investor with a 70% allocation to growth assets would be a risk score in the range of 57 to 69, or could be stretched to the range of 51 to 78.

FM-Investment Mapping

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The starting point (most general view) of your asset mix is based on the desired allocation to growth assets versus defensive assets. Continuing with the above example, let’s assume that the objective for your portfolio is growth and that you are comfortable with 70% in growth assets (equities) and you want 30% in defensive assets (cash and fixed income). Next to performance, it is this split between growth and defensive assets that many of our clients focus on.  Because we use professionally managed portfolios (mainly mutual funds), the asset mix at all levels is dynamic, depending on the trading activities of the portfolio managers. However, in this case, when the mix is more than a few % points above or below the 70% growth, it’s a signal that we need to rebalance. Rebalancing is simply the process of realigning your portfolio holdings with your target asset allocation.

When you examine the returns of the investment funds listed in the following table, you see some big one-year numbers compared to the long-term averages. This suggests that the 30% defensive component of your portfolio may have been overwhelmed by the recent galloping growth of the equities. To manage the risk, without looking any further into your investment holdings, you can see that it’s likely time to rebalance your portfolio. (The table below includes the investment funds in terms of most dollars invested for clients of Fraser & Partners.)

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As you drill deeper into your portfolio, the next layer for rebalancing requires analysis of the allocation within “defensive” and “growth”.

Defensive” is defined in terms of the allocation to cash and the allocation to fixed income (bonds or other interest-generating investments).

Growth” is defined in terms of allocation to equities with different characteristics. Rather than thinking in terms of geography, we have started to use the following groupings when building and rebalancing portfolios. These groupings are more useful in our increasingly interdependent global economy:

  • large cap equities (representing mutual funds that invest in large Canadian and US companies, typically dividend paying);
  • small/mid cap equities (representing mutual funds that invest in small to medium sized Canadian, US, or global companies);
  • global/international all cap equities (representing mutual funds that invest in companies that span the globe, often based on the portfolio manager’s best ideas, or a global theme or other specific approach to selection of investments, no restriction on size or location of the company that can be owned);
  • focused equity (representing mutual funds that invest in companies in real estate, or in a specific country or industrial sector, or other narrow focus).

The graphic below shows the framework that we are applying to determine the allocation into each broad asset class. It is at this level that some of the most important decisions are made relative to your long-term investment success.

30-70 Portfolio

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The final step, to which clients and advisors often devote the most time, is the selection of the individual portfolio managers and the specific investment funds. This is the most fun but also challenging. At this level, working within the framework outlined above, we draw on the technical analysis provided by SIA Charts to identify the managers and investment funds which are demonstrating favourable relative strength. By using a systematic approach and being very disciplined, we can help you achieve the investment results that you need to live your Life Aligned™.

If you haven’t made any changes in your portfolio lately, unless you are investing primarily in balanced funds, a portfolio review is definitely in order and some rebalancing is likely required.  I encourage you to get in touch with your advisor this summer, earlier rather than later, to review and take the action that may be indicated.

Have a great summer!

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

This blog article is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call your financial advisor to discuss your particular circumstances.

What’s up with Gold?

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In the spring of 2009, when Canada was riding high on the commodities boom, the buying binge in gold exchange-traded funds and futures was estimated to be 100% of the actual mine supply. In July of 2013, with US government debt declining and the US dollar strengthening, the stampede to the exits from gold peaked at the same extreme level – 100% of the actual mine supply. Quite a change in five years! Does that mean the gold rush is over? What about all the talk (fear mongering?) about gold as the only way to preserve your wealth in the face of relentless inflation?

Should you be holding or adding precious metals or gold bullion mutual funds to your investment portfolio or should you be turning your attention entirely to the roaring equity markets?

As always the answer depends on your personal circumstances, but here are a few things to consider from the perspective of growth potential as well as risk management and portfolio diversification.

1) Global currencies: It used to be that the value of a country’s currency was based on the amount of gold that the central bank had in its vault. There is no longer a “gold standard” upon which to base the value of the paper money used around the world. The US dollar serves as the world’s reserve currency, and earns this position because it is an economic powerhouse with significant financial flexibility. However, the US government debt is very high (Gross general government debt is 110% of US GDP). It remains to be seen whether the US can engineer their way out of their long-term debt crisis without a serious loss of value of the US dollar. Unlikely as it may seem, many economists argue that a return to the gold standard is going to be required.

2013-05-06-china-currency-war_72px2) Demand for gold: Central banks are continuing to buy gold. It is reported that China has traded $70 billion USD this year for gold. Chinese demand for gold is more than 55% of global gold production. As China takes measures to internationalize its currency, it is speculated that China wants to use the yuan for global trade, competing with the US dollar as a reserve currency. To achieve this, it is estimated that China needs another 16,800 tonnes of gold in reserves, which is the equivalent of six years of global gold output. (Enjoy the cartoon used with permission of the American firm Merk Investments.)

3) Supply of gold: The price of gold has declined so much that it is close to the cost of production (US$1200/oz). This is resulting in closure of marginal mines and deferral of new projects, which leads to less overall production. With supply decreasing and demand increasing, the most likely result will be an increase in the price of gold.

4) Portfolio diversification and risk management: Gold does not generally trend in the same direction as the equity markets. While your precious metals or gold bullion fund may not perform in rising equity markets, you may want to have it there as a form of insurance. When inflation comes, the purchasing power of your dollar will be diminished. With artificially low interest rates in the US (repressed by the actions of the central bank, the US Federal Reserve), it is unclear when inflation will come – but just in case paper currencies in the developed nations decline in value, you need a little insurance. An allocation of 5% of your portfolio would be sufficient. We don’t know what the future holds.

If you want to discuss this blog or obtain references for more detailed information, please let me know. Although I don’t personally subscribe to the extreme views regarding the US debt, I have found over the years that it is beneficial to think about points of view which conflict with your own assumptions. I hope you find this blog thought-provoking.

Is bungee jumping on your bucket list?

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You may or may not relish the idea of hanging upside down on a bungee cable. If that’s too risky, would you be more comfortable circling through the air on a ferris wheel? These experiences are dramatically different. Which would you choose? Your choice will be indicative of your risk tolerance.

Many clichés are used in terms of risk and one’s philosophy related to risk-taking: “Nothing ventured, nothing gained”; “Go big or go home”; “Better safe than sorry”. Each of these expressions contains a bias, but risk is not inherently good or bad. Let’s start with the definition of risk tolerance according to the International Standards Organization (ISO).

Risk tolerance is the extent to which you are prepared to risk experiencing a less favourable outcome in the pursuit of a more favourable outcome. It is the point at which you are psychologically comfortable with the implications of your choices – the potential loss or gain.

Research suggests that tolerance for risk, as with other psychological traits, is determined by genetics (how you’re built) and also by your life experiences and current circumstances. There are five different categories of risk: physical, social, health, ethical, and financial. Your risk tolerance may be different in terms of your health compared to your finances, for example. Although relatively consistent, studies show that risk tolerance does change and should be retested periodically. At Fraser & Partners we have been implementing a three-year planning cycle. Optimal results appear to be achieved if you undertake a thorough review at the end of every three years and recommit to your life vision and financial strategy. This includes a reassessment of your risk tolerance. You may need to rework your strategy more frequently if you are experiencing major changes in your life. Otherwise, during the three-year planning cycle, specific reviews of your cash management, income tax, portfolio, insurance and/or estate plan should enable you to keep on track each year.

To encourage you to assess your risk tolerance, we have a questionnaire available for you to take online. Talk to your advisor about getting signed up to take it. The questionnaire, developed by an Australian firm, FinaMetrica, is used globally, with norms for each country or region including Canada. Because it is so well researched, we find that it can be used to reliably pinpoint the relationship between risk and your financial decision-making. From a strategic planning perspective, it is important to understand how much risk you can tolerate – how much is too little and how much is too much, and to clarify how this relates to your financial strategy.

You can consider risk from many different perspectives – short-term versus long-term, real versus perceived, myths versus historical evidence, uninformed versus calculated.

If you were to brainstorm all the risks that you might face, you could likely generate a long list. Some of these may be on your list.

  • not living the life that you want for you and those important to you;
  • outliving your money;
  • not being able to pay your bills;
  • not being able to take care of your children;
  • getting hit by the bus as you cross the street;
  • your bank going broke;
  • having too much money and worrying about it all the time;
  • losing your job;
  • losing your money;
  • having your identity stolen and fraudulent activity occurring in your bank accounts;
  • failing a test;
  • getting a traffic ticket;
  • becoming unemployable because your job skills are obsolete;
  • taking a new job;
  • getting married;
  • not having a medical doctor when you need one;
  • running out of gasoline;
  • owning bonds/bond funds when interest rates are going up;
  • the value of your portfolio fluctuating with the ebb and flow of the financial markets;
  • your internet service going down;
  • losing your cell phone;
  • owing too much money;

If we reorganized the above list into the five categories of risk, we could more readily address them. Themes would emerge and we could build a plan. Generally speaking, it is advisable to take steps to protect yourself against the risks that may be less probable but that would be the most devastating if they were to occur.

As we apply the life planning process, risk management is central to the discussion. Many simply think about the risk of the financial markets, especially after the previous decade during which we experienced a disproportionately high level of volatility. The global recession, brought on by the credit crisis in the US (housing bubble and excessive mortgage debt), was traumatic.

As you review your Risk Tolerance Report (FinaMetrica), please think in terms of life as an adventure and the challenge you have in designing your adventure. Understanding your risk tolerance helps you to clarify what really matters most to you. Every day is immeasurably more enjoyable when you know that you’re prepared for the uncertainty that is life!


Lately I’ve had a number of comments along these lines “How are my investments doing? I’m afraid to look with all the things going on in the US (debt ceiling debate, a very vocal Tea Party and other political shenanigans). If you are investing through F&P, you likely are invested in investment funds whose portfolio managers are active – those who outperform over the long haul because they do the research to find businesses that are different from those included in the index. “Active share”, the percentage of portfolio holdings that are different from the index, correlates with outperformance over the long-term. That’s a topic for another day!

To provide a context other than the 30-second sound bytes by the media, let’s look at the historical performance and the volatility (risk) of the key indices used to track trends in the financial markets.

You cannot control the markets. You can control how you invest your money.

As we build out the content of this website, we will provide more detailed information on portfolio design that you will be able to reference. With such an abundance of information available on the internet, it seems as if it is actually more difficult to maintain clarity in terms of your risk tolerance and your investment approach.

Below are the historical asset class returns that we are currently using when projecting returns of different portfolio mixes.

Asset Class Benchmark Index Years Historical Returns since Inception to December 31/12 Historical Volatility Risk
*Cash 91 Day T-Bill Index 63 3.34% 3.98%
*Short-Term Fixed Income DEX CDN Short Term Bond Index 47 3.97% 4.97%
Fixed Income DEX Universe Bond Index 63 5.97% 8.06%
Canadian Equities S&P/TSX Composite Total Return Index 63 8.86% 17.03%
Canadian Small Cap Equities S&P/TSX Small Cap Total Return Index 26 8.86% 23.84%
U.S. Equities S&P 500 Composite Total Return Index CDN$ 63 9.43% 15.95%
U.S. Small Cap Equities Russell 2000 US Small Cap Index 34 9.61% 18.14%
International Equities MSCI EAFE Total Return Index CDN$ 41 8.02% 21.94%
Emerging Market Equities MSCI Emerging Markets Index CDN$ 25 12.00% 30.32%
Real Estate S&P/TSX Capped REIT Index 63 8.93% 12.26%

*These returns are built on an assumed forward-looking inflation rate of 3%. The asset classes for cash and short-term fixed income have been adjusted downward arbitrarily. The historical real return on cash has been reduced by 1.5% in light of historically low interest rates. Source:

In future blogs I’ll review the historical performance of different asset mixes or allocations relative to inflation. If you have any questions about the table above, call your advisor or make a note of the question and raise it when you have your next meeting.