ESG and What it’s Doing to the World

ESG and What it’s Doing to the World

By now, everyone has sat in, or wanted to sit in, their friend’s Tesla. It seems as though everyone knows a guy who knows a guy who owns an Electric Vehicle (EV for short), and they all boast about how environmentally conscious it is. A few years back, I worked at a Dodge dealership in southern Alberta. Out there, the idea of an electric vehicle taking over the land of diesel trucks seemed absurd. At the dealership, we never waited for Dodge’s environmentally friendly car to be released, we all wanted to drive the Hellcat, Dodge’s beefed up racing engine. I’m sure it had the environmental impact of two or three trucks, but it was loud and fun to drive!

But I digress…

The current war in Ukraine has brought the topic of clean energy to the forefront of the investment landscape. If you’ve visited a gas station recently, you would have noticed that the price of fuel seemed to skyrocket shortly after Russia’s invasion began. This is because a large amount of the world’s oil comes from Russia. With sanctions being placed on Russian oil, the countries that relied on it must find their oil elsewhere. Canada doesn’t rely heavily on Russian oil, but the oil we do buy just got a lot more expensive.

As countries have seen the cost of oil increase, the shift to green energy has started to take a front seat. What if we didn’t have to rely on oil as a major source of energy in the future? Obviously, the sanctions have exposed a flaw in the current geo-economic supply chain. One possible solution is to fast-track other forms of clean and renewable energy. This may include hydro, solar, or nuclear energy.

As the world shifts it’s focus to environmentally protective alternatives, I think it’s prudent to weigh the pro’s and con’s of change. This is not to say that change is inherently bad, but it’s important to know all the facts before sticking the “I save the planet” sticker on the back bumper. For example, I can get on board that plastic straws are not good for the environment, but if I had known that the alternative was paper straws that disintegrate in your drink, I would have joined the movement to come up with other solutions.

What goes into EVs?

When we look at the environmental impact of anything, we should look at more than just the post-production use. If we only looked at the metrics of EVs once they’ve hit the road, there would be no debate between EVs and gas vehicles. Instead, we need to consider the pre-production, production, and post-production measurables. This would include the development of the batteries, mining of materials, transportation and manufacturing. When we look at comparing this to gas vehicles, there are a few things to keep in mind:

1. EVs are still in their infancy. The technology has been in development for decades, but only recently that the technology has gotten to a point where it has practical uses in cars. This is important, because it ties into other aspects of their carbon footprint, specifically related to infrastructure. Whereas the oil and gas industry has had years to set up pipelines, transportation, and regulations, EV producers, specifically battery producers, have not had the same advantage. There is still a long way to go in setting up the infrastructure and regulation that will bring the carbon footprint down.

2. There is more to producing a vehicle than the environmental impact. I wrote an article a few months back about ESG investing (Environmental, Societal, and Governance). Some people/companies focus on different letters, but I do believe that if the goal of ESG investing is to support the world becoming a better place, we need to keep all three letters in mind. If you’ve ever googled a Lithium or Cobalt mine, you may notice that, along with it not being an environmentally friendly process, it still utilizes practices that would give it a negative societal score. For example, much of the cobalt/lithium that is mined comes from the Democratic Republic of Congo. It’s common practice in the Congo to use child workers and/or child slavery. They also mine, knowing that the byproducts of their business leak into the ground and affect surrounding communities. So when we evaluate the pre-production impact of EV batteries, I strongly believe we have to incorporate the overall cost, not just the environmental cost.

3. The environmental impact can range depending on what electrical grid you live on. If you live on a coal based energy grid, charging your electric car has a greater impact than a city run on hydroelectric or solar/wind power.

There is an ongoing debate between the true numbers when it comes to the carbon footprint of an electric vehicle. Some of the factors surround where a car is being driven while some differ in their calculation of material transportation. Both of those factors swing on geography. Now, that problem isn’t exclusive to electric cars. For example, cold weather makes a car run less efficiently. Also, different levels of air quality can effect engine combustion. Someone running a study in California would get a different carbon footprint than someone in Alaska.

The big question I wanted to ask is, “How far would I have to drive an EV to get a carbon footprint that breaks even compared to a gas vehicle”? It’s a tough question, because there are so many factors that can change the answer, as well as the non-carbon related outcomes that have to weigh on my decision. Reuters ran a study that tried to quantify this question and came up with this answer: 

“Its “well-to-wheel” study showed the typical break-even point in carbon emissions for EVs was about 15,000 to 20,000 miles, depending on the country, according to Vijay Subramanian, IHS Markit’s global director of carbon dioxide (CO2) compliance.”

This means that, in Canada, you’d have to drive 24,000-32,000kms before you hit a ‘breakeven point’. Obviously, there is still a lot of room for error, and some researchers don’t agree with that study. Damien Ernst, a researcher out of the University of Liege in Belgium, believes the number is closer to 67,000-151,000km. 

Let’s use 50,000km (roughly the midway point between 32,000 and 67,000kms). Assuming you drive around 15,000-20,000km/year, it would take close to 3 years of driving to break even. THEN you add on the societal impact and humanitarian rights violations. The question we have to start asking ourselves, is two-fold:

1. What value do we put on human rights violations?

2. How do we advocate for better regulation of those industries?

It’s clear to see that the production of the electric cars and the post-production impact is minimal, but there are still pre-production issues that need to be solved before many can jump on the EV bandwagon with a clear conscious. In today’s age, we would call for the government to regulate the auto industry, to ensure that they have checks and balances in place to protect the people who mine for the minerals. With the EV car industry quickly becoming a major player, I have to wonder how much pushback companies are going to provide, given that any regulation usually means adding expenses.

I’m hoping there’s a future where everyone has moved from a purely gasoline car, to something more sustainable. Along with EVs, hydrogen cell technology is becoming more common, and hybrid technology has been around for a while. Whenever we weigh the value of a solution, we must weigh it against the current state of things. Just because a solution isn’t perfect, doesn’t mean we shouldn’t change anything. The goal now is to realize whether or not the current issues with EVs are better or worse than the current issues with gas powered vehicles. I don’t know what the solution is to electric vehicles, but I know one thing for certain: I hate paper straws.

Not the B-Word!

Not the B-Word!

New Year, New You

Sometimes when I’m trying to find a blog topic, I try to get super creative. I envision questions that people may have in relation to what’s going on in the world and I try to give some form of analysis or opinion to further educate my readers.

My most recent point of inspiration came from an article title about how businesses (mainly gyms) were scrambling with the new restrictions in place. I could go into a macroeconomic spiral of small businesses and their impact on the economy, and maybe one day I will, but it made me think about how all those employees have been going back and forth from work to laid-off, and how the most pressing financial questions they have are about day-to-day finances.

Yes, today, we’re going to discuss the B-Word: Budget.

So first off, I have only met a small (and I mean small) hand full of clients who enjoy budgeting. For most, a budget is a set of handcuffs from which they want to break free. Because, as many have experienced, you typically build a budget when money is becoming an issue. With that perspective, the goal of a budget is to eventually ditch the budget altogether!

I like to tell my clients that a budget is much less important to financial success than one may think. If the goal of budgeting is to buy yourself time until you can catch up on bills or get a pay raise at work, you end up locking yourself in a vicious cycle of never feeling at peace with your finances.

So what’s the solution? Is there an alternative, or is it all doom and gloom?

Never fear, Garrett’s super-helpful-and-wildly-inspirational blog post is here!

Let’s talk about perspective and psychology for a moment.

If we look at our spending habits in the way described above, we are always looking for a change. Intrinsically, our financial plan relies on a constant swing from a financial freedom to financial restriction. In that case, budgeting is the consequence of either reckless spending (i.e. recovering from Christmas), or bad luck (an unexpectedly large repair to your car). The goal is to choke back spending to a point where you can ditch the budget and get on with life. The only problem is that Christmas is a yearly holiday and you never know when the transmission will fall out of your car.

What if we looked at budgeting as a behavior rather than a prison sentence? When you count each individual dollar, it’s hard to imagine, but if we look at your budget as a filter, we can avoid the repeat offenses.

Here’s how I see it. There are only three types of expenses:

  1. Necessary (needs)
  2. Unnecessary (wants)
  3. Waste

Obviously this is an oversimplification, but the process of creating a behaviour starts with making things simple.

So, first step: Define your needs. Traditionally, these only include the items that are required to take care of yourself and your family. Rent, groceries (not snacks), clothing (basic, not ‘extra’), etc. At the end of the day, when you look at your list of ‘needs’, you should not be able to remove anything from that list without the risk of mortal suffering.

Wants are a bit different, but may be extensions of needs. For example, I have 10GB of data with my phone plan. Do I need 10GB? Absolutely not. I don’t really need any data. For business, I need a phone, but the additions to my plan (and the phone itself) are all wants and not needs. This would extend to designer clothing, snacks, and other items that can be removed from your life without affecting your foundational well-being.

Waste is everything that falls through the cracks. When I sit down with clients and start the discussion around budgeting, we make a list of everything they expect for monthly expenses. We then compare that to how much money they bring in monthly. Quite often, we look at the difference and see that there should be a couple hundred dollars left over.

When I ask them if that feels right, they seldom agree. Even though their ‘budget’ says they should have $500 in unallocated income, they often feel like they live paycheck to paycheck. This is where ‘waste’ comes into play. We sometimes refer to this as the “latte factor”. No one budgets for coffee, because it’s typically such a small expense. But when you get a Starbucks coffee 4 days a week, at $5 a drink, the waste adds up. Inevitably, there will almost always be some degree of waste in a budget, but the behaviour change we want to build will allow us to not sacrifice the “Needs” and “Wants” for “Waste”.

That brings us to a few general rules of thumb:

First: Pay yourself first. This seems like an obvious strategy, but it is often disregarded in practice. When you get paid, do you start by paying off your rent, putting money onto the credit card, and making a grocery run? If there’s any money left over, you take yourself our for a nice lunch? What happens at the end of the month? Most often, unless your income far exceeds your expenses, you are waiting eagerly for the next paycheck. Paying yourself first means that you put money into savings before you do anything else. This requires knowing what your needs are, because you will have to pay for those, but get some money set aside for emergencies or long term savings before you get caught up in the extra stuff. Often, the ‘savings’ portion of someone’s budget is left for the end. They say to themselves, “If there is anything left after my expenses, my lunches, and my lattes, I’ll put something away for the future”.

The problem is that there is almost never money left, because there is always something that seems to take priority. For example, debt. Getting into the habit of paying yourself first can a) change your mindset around all your other expenses, and b) allow you to not rely on debt as much.

Think about it this way: most of my clients SHOULD have a few hundred dollars in unallocated income each month. If they put that money into a savings account first, then dealt with other needs, then wants, they may still have some money left for their lattes, but they know that they can spend that extra money without sacrificing their future savings goals.

Second: Budget your waste. If drinking expensive coffee is a common occurrence for you, don’t leave it in the waste category. If it isn’t something you want to give up entirely, start to track it. Sometimes the realization of how much it burdens your expenses can give the expense new perspective. This is true whether it’s weekly coffee, multiple streaming subscriptions, or other extra purchases.

Third: Think before you spend. The point of changing your behaviour around budgeting is that it should be treated as an exercise and not a punishment. Instead of looking at cutting expenses as a consequence, think about it as an opportunity to have more options in the future. The mental shift takes time and attention.

I have heard of multiple devices that have been used successfully to help with the shift. One of them is freezing your credit card in a block of ice or putting it in the fridge. The simple act of having to go to the freezer to get your credit card before making an online purchase gives you an opportunity to rethink your purchase decision. How easy has online shopping made it to buy something without thinking? They save your credit card information, have your address saved and ready to go. All you have to do is press “Continue” and it’s at your door a few days later. Their goal is to give you as little time as possible to change your mind.

Another tactic is to put all your coffee (or other activity) money in an envelope. This forces you to see the bills before you buy, rather than being able to ‘tap’ for $5 here or there. It takes effort, and it is awkward at first, but it gives you an opportunity to question whether or not you should be buying it.

The third tactic is a simple reward system. I’ve used this successfully in the past, especially when it comes to buying coffee. If I’m craving something sweet, I’ll tell myself that I have to accomplish something first. This could be as simple as cleaning the bathrooms, doing the dishes, or running an errand I’ve put off while I’m out. Sometimes, I still get a coffee, which is perfectly fine. Other times, I finish my task and the craving has subsided. All of a sudden, I’ve transitioned my mental space from needing that coffee to something else entirely. Not only have I crossed something off my to-do list, but I’ve also distracted myself long enough to let the craving pass. I’d say this has reduced my coffee expenditures by 50%.

Here’s what I’m not saying.

I’m NOT saying that budgets are bad, or that you shouldn’t use a complex budget system to track your expenses. I have seen clients use physical (or digital) budgets with great success and failure. The element that is often missing from people when they fail at budgeting is their mindset. They define financial freedom as being able to spend however much they want and indulge every craving without needing to consider consequences. That’s quite often not the case. Financial freedom is having a process that allows you to spend without sacrificing your future. Some people achieve this by finding a profession that pays such a high income that they don’t have to put on any restraints, but many people’s reality dictates that there is some form of discipline in place.

So where do I start?

It takes time and energy to make a change. Right now, if it weren’t for lockdowns, I’m sure we’d be witnessing the New Year’s rush at the gym. People head in with the idea of cutting out all their bad habits and creating a “New Me”. The problem is that, by February, they’ve dropped the 5 pounds, feel like they were successful, and revert to their old habits. The people who are at the gym year round have built dedicated processes and habits into their lifestyle to make their physical health a priority.

It is no different with budgeting. A new years diet simply restricts you until you’ve lost weight, but the habits that you built over the rest of the year are still there when you let your guard down.

So start with the simple things. Write down what falls into your needs, wants and waste categories. Look at the ways you spend your money and start with small and manageable changes. The gym enthusiasts didn’t start out by going to the gym 5 days a week and eating super healthy. They started by cutting McDonalds out of their diet and replacing it with a home cooked meal. Consistent small changes make a long lasting difference.

There’s a 1% rule that I like to reference. If you make a 1% change to your lifestyle each week, you are 52% better off by the end of the year.

All it takes are small consistent changes to be successful.

Factcheck your Finances: Understanding the Cost of Investing

Factcheck your Finances: Understanding the Cost of Investing

Any service has a cost. If I were to call a plumber, I would be charged a fee for the service call as well as the repair cost. That’s over and above the cost of his or her labour. The benefit to me is that I get to enjoy a working tap or a drain that keeps water from getting all over my floor.

Weighing whether or not you need the service of a Financial Advisor is a similar decision. As a Financial Advisor, my ‘rule-of-thumb’ is to say that you should have an advisor, but that may not always be the case. The real question that needs to be answered on a personal level, is ‘does the cost of investing outweigh the value of investing?‘.

A Tale of Two Investors

Let’s paint two pictures. The first is of a person who has experience in financial industry, general knowledge of economics, AND has time to do their research. Side note: a ‘general knowledge of economics’ seems pretty vague, but I define it as knowing what factors go into making investment decisions and knowing what questions to ask. If you don’t know enough to understand what you DON’T know, you’re in for a lot of surprises.

The second person is someone who works away from the financial industry, may or may not enjoy trying to follow the markets, but doesn’t have the time/energy to keep up to date with what’s going on in the investment world. We’ll come back to them in a second.

What is the Cost of Investing?

First, I’d like to go over fees and what they actually represent.

Usually people talk about fees as if they are interest rates on a loan, the idea being: lower is better. The ‘standard’ fee you will see attached to different funds and ETFs is a MER (Management Expense Ratio). This is just one of the factors that goes into the ‘cost of investing‘. This fee is shared by the investment company and investment dealer, and is how your advisor gets paid.

For example, if a Fidelity Global Equity fund had an MER of 2.5%, you would see 0.208% (2.5%/12) deducted from your account each month. A portion of this fee goes to Fidelity Investments to pay their expenses (taxes, administration costs, registration costs for registered plans, and management/research). The other part goes to the dealer and pays similar expenses on their side. Your advisor may get paid a salary (more common in banks) or they’ll get a portion of the dealer’s fee.

ETFs have much lower expenses than mutual funds simply because they are typically not actively managed (buying and selling stocks on a daily basis to try and out perform the market). If I was building an ETF, I would look at an index (the S&P 500 for example) and copy/paste it into a fund. I would buy all the same companies and hold them in the same proportions. Once the initial stocks are purchased, very little work goes into the maintenance of the ETF.

ETFs have evolved and now have the availability of limited research options which help bridge the gap between a ‘no-research’ model and a mutual fund. A mutual fund would use the S&P 500 as a benchmark and build a portfolio with a similar mandate, but with the objective of beating the index. Their goal would be to outperform the S&P 500 by buying better companies, adjusting their asset proportions, or waiting until some of the ‘over-priced’ companies go ‘on sale’. This requires a team of analysts and managers, and therefore requires a higher fee.

The other factors that go into the cost of investing are time and flexibility, among others. When you put money into the market, whether through your advisor or through third-party services, you are essentially tying up that money. You, as the investor, sacrifice your financial flexibility. If you put money into a non-callable (locked-in) bond for example, part of your return is designed to compensate you for not having access to your money for a period of time. Some funds will also invoke a ‘short term trading fee’ if money is invested and devested within a short period of time (usually three months). Time, on the other hand, is a resource that is in finite supply. You can either use your own time to do research yourself or pay a professional to do that research for you (seen in MERs).

What are the options for DIYers?

If you have internet access and a set of eyes, you’ve probably seen many ads for companies such as Wealthsimple, Questrade, or some other DIY investment platforms. These services boast low or $0 fees as their lure away from the traditional banking relationship. So it begs the question, “will I be served better by advice or by a lower fee?”. On these platforms, you are often left to your own devices to chose individual stocks or ETFs, or you’re lumped together with other DIYers and placed in 1 of maybe 5 portfolios preselected by them based on a questionnaire you answered.

If we look at the question above and apply it to investor #1, the answer may be ‘lower fee’, and I don’t think that’s a bad assumption. The beauty of the low cost model is that if you’re already making all the decisions with your money at the bank, you can have a similar experience without paying for someone else to facilitate your plan. You have the ability to look at the investment market through an educated lens and make decisions that will generally lead in the right direction.

Investor #2 is a different story. I follow reddit threads every now and again because it gives me a unique look at how DIY investors view and create their own portfolios. Some do a great job and talk about diversification, asset allocation, and contribution disciplines. Others try to speculate and ‘guess’ at how companies will respond to the markets based on their own bias. For example, one individual invested in an outdoor motorsports company because they liked their ATVs. There was no due diligence done around the company,  it was simply a bias towards their product.

The most common ‘theme’ I noticed is that most of the ‘redditors’ had investment proposals already created. They went online in search of validation and confidence from other users that they were making the best decisions. More simply put, they were bouncing their ideas off of this internet forum and using the other users as their collective ‘advisor’. Sometimes that works and you get some great feedback. Other times you get the opinion of the ‘wrong’ people and you end up in a ‘blind leading the blind’ situation.

Are you #1 or #2?

Rarely do people connect themselves perfectly to investor #1 or #2. My experience is that investors fall on a spectrum. Some clients want to have their hand held and will take my advice and recommendations very willingly. Some have their own understandings and background knowledge and use me to facilitate and ‘fact-check’ their understanding. My role, and how I earn my ‘fee’ as an advisor is to provide enough value to my client that they don’t resent the fee they pay.

This looks different for each client. For my hand-held clients, it’s giving them access to recommendations that they wouldn’t have come up with themselves. That fee saves them time and energy when it comes to decision making, while also providing confidence that there isn’t an obvious ‘hole’ in their plan. For my independent clients, it’s a matter of expressing ‘approval’ or alternatives that they may not have thought of or known existed. Either way, if I (or any other advisor) is not providing enough value to justify the client’s expense, we should not be surprised when a client moves to a different platform.

Your choice.

I think that choosing a financial advisor is like anything else in life. If my car breaks down, I can choose to fix it myself or take it to a mechanic. He’s a professional who has spent years honing his abilities to recognize and diagnose problems. He also has the tools to fix them. For me to do it on my own means I have to spend time and money going out and researching my car’s problem, buying the tools to fix it, and hoping I get it right. Financial advising SHOULD be the same, and if you find yourself wondering where your advisor adds value, you should be re-evaluating their role in your financial planning.

Having an advisor adds to your cost of investing, but it can also produce better rewards. Those rewards may not always be financial, but they should be valuable. Some of the ways you should seek value is through advice on how to reduce your taxable income, how to best take income in retirement, how to best save for specific goals, and/or how to feel secure in your portfolio’s risk-to-reward relationship.

Don’t be afraid to be picky with choosing your advisor. Advisors should be knowledgeable and able to make un-biased and educated recommendations that have your best interests at heart. You work hard for your wealth, and you should put your trust in someone who understands the importance of protecting it.


By the Letter: The Benefits Behind Financial Education

By the Letter: The Benefits Behind Financial Education

I’ve worked in a few industries. When I first graduated high school, I moved to Sudbury where I would thrust myself into emergency medicine. I graduated from Cambrian College and started a career as an Advanced Care Paramedic with the City of Greater Sudbury. Through my time there, we had to maintain “CE (continuing education) Credits”. From Sudbury, I moved to Lethbridge, AB, where I worked as a paramedic in the oil fields north of Grand Prairie. On top of the CE credits I was obligated to maintain through the Alberta Health Services, I also had to maintain certification in oil and gas specific credentials. These took up time and money, but whenever I went to one of these courses, whether it was H2S (hydrogen sulfide) training, or wilderness training, it always seemed to be, what we referred to in high school, as “Bird Courses”.

A “Bird Course” is essentially a course that has no meaning or is “for the birds” as it were. They often took an evening or a weekend and consisted of someone standing at the front of a class and “teaching” us all about how we shouldn’t do things that most people wouldn’t do anyway. The snooze-fest of a day was capped by a short quiz to prove you showed up.

So why do I bring up CE credits?

Let’s just say that ‘the birds’ are flying in a different direction.

Though there will always be educational requirements to maintain licensing and there will always be courses that seem like they are around simply to slow down the process of starting or continuing a career, I wanted to go into the specifics of why CE credits, or continuing education as a whole, can be important.

Continuing Education in the Financial Industry

I recently passed my CFP (Certified Financial Planner) exams. It consisted of four long courses and three two-hour exams. When I tell clients that I passed my CFP, they start by congratulating me, but then ask, “What does that let you do?”. That’s a valid question.

Historically, there have been a lot of designations in the financial industry. For example, Rick Tomalty, my father and one of the partners at my firm, has a multitude of letters after his name (CFP, CLU, CH.F.C., CHS, MFA, CEA, CKA). To be honest, if you asked me what those “let him do”, I would have no real answer for you. What I do know, is that he has been able to use those designations to help people navigate their financial dilemmas. For example, one of those sets of letters represents a course that allows him to be the professional executor or trustee of a will. When clients had specific questions about how to deal with their parent’s passing, he was able to step in and give more than the generic, broad-based answer most financial advisors would give. He may not use that designation every day, but it made a huge difference in that moment.

When I was a paramedic, we were trained to be a “jack of all trades, but a master of none”. We were supposed to know enough about every body system to keep people alive until they got to the hospital. That’s very similar to how most financial advisors practice. They know investments and/or insurance, but only scratch the surface of what’s “need to know” about other aspects, whether it’s tax planning, estate planning, power of attorneys, trusts, incorporation and corporate structure, ect.

This is where designations like the CFP come into play.

The CFP designation does not give me any special superpowers, but it allows me to speak as an expert of matters outside of general investments or insurance. The course specifically connects investments and insurance to the other aspects of peoples lives. FP Canada, the regulatory body for Financial Planners, wants to breed advisors who will look at their clients through a holistic lens. Where 15 years ago, most of those letters behind Rick’s name had a very impactful meaning, the big one that has moved up is the CFP. Soon, within the next few years, having your CFP will be a “table-stakes” designation to be a financial advisor. In the same way accountants have different accreditations to distinguish themselves, the CFP designation (and QAFP, Qualified Associate Financial Planner) differentiate advisors from your traditional ‘investment/insurance salesmen’. When you go to see your accountant, you will have more confidence seeing the “CPA” designation compared to your average H&R Block representative.

Just like other industries, the financial industry has required CE credits for each year, but these are simply because we live in an ever-changing world. The last two years has provided more evidence of that than we need. My clients trust me to stay on top of the investment market and to provide them with confidence that they don’t have to maintain up-to-date knowledge themselves. The CFP brings about another layer of trust that my recommendations are more encompassing than what is happening in that moment.

An ending note:

My opinion of continuing education prior to entering the financial services was quite negative. In the medical field, there were rarely ever new findings that constituted radically changing our perception of how the body functioned. CE credits really turned into a yearly refresher of knowledge and tactics we already used daily.

This industry has changed my perspective because the credits serve a new purpose. It seems as though every time I look at the news, there is a new outlook or case study that gives us better insight into how to work with our clients.

So however you get your financial advice, know that the letters make a difference.

Some people have the benefit of years of experience, while others (like myself) have invested time and energy into learning what experience has yet to teach them. Unfortunately, I have seen many cases of people taking financial advice from friends, who got it from their friends or from their advisor. Suddenly, it becomes second or third hand advice, and as seen in the game “telephone”, that often leads to a twisted echo of the original message.

I would hesitate to get advice on how to build a home from a plumber. He would be an expert on that specific part of the building, but he wouldn’t know the intricate detail it takes to add electricity or windows. That’s where a contractor will come in and be able to look at the home for what it is. Building a home takes knowledge and understanding of a multitude of components. The contractor is able to use his body of knowledge to advise and piece all the parts together so you aren’t left with a poor foundation or inadequate power.

If you start to look at your financial “home” the same way, suddenly it becomes obvious why a contractor, or someone who knows how to connect all the intricate parts of your life, becomes valuable.


Risky Business: The Efficient Frontier

Risky Business: The Efficient Frontier

I was reading an article the other day about the risks associated with the COVID-19 vaccine. Don’t worry, this is not an article focused on vaccines and whether or not they work! This article simply had me thinking about risk and how everyone talks about risk differently. Some people use risk to balance pro’s and con’s. For example, jumping out of an airplane has pro’s and con’s. The “pro” is that it’s (probably) exhilarating. The “con” is that you could fall to your doom if your parachute doesn’t deploy.

I would say most people look at the above example and fall somewhere on the scale between wrapping yourself in bubble-wrap while staying away from the sun, and diving head first out of a plane WITHOUT a parachute. But what about specific investment situations?

I was chatting with someone recently who mentioned how the they chose bonds and GICs because they are “risk free”.

One of the more common comments we receive as advisors when discussing people’s investments, whether this is in a boardroom or on the golf course, goes something like this, “What kind of return do you guys get? My buddy, so-and-so, got 20% last year.” There’s nothing wrong with comparing returns if done in the context of risk. For example, how much risk did he have to take to get 20%? How has his investment performed in the years prior to last year? People love to talk about the good years. Oddly enough, some of that vigor leaves when they have to disclose the “down” years. So today, I want to chat about risk through the lens of financial planning. Maybe it will shed light on some areas of risk that are not always considered.

Investment risk

Risk comes in all shapes, sizes and perceptions. Risk perception is a key component, because it really aids in developing investor psychology. For example, some people view the S&P 500 (one of the main indexes for the US market) as a ‘risky’ investment. Others would argue the opposite. For the sake of illustration, I’ll argue both sides for you.

The S&P is a risky investment. It is made up entirely of stocks (ownership in different companies) and if those companies drop in value, so does the value of your portfolio. You leave the fate of your wealth in the hands of the men and women who run those companies AND other investors who will buy and sell those companies in bulk, which can sway the demand/supply relationship. In March of 2020, we saw a massive sell-off of stocks that equated to a roughly 30-35% decrease in the equity market. The sell-off was mainly based in fear of the economic forecast for companies, given that COVID-19 had finally made it’s way to North America.  Therefore, un-predictable elements can quickly shift the value of the S&P 500 and it is risky.

On the other hand, the S&P is not a risky investment. Some people look at the index and think, “historically, the S&P 500 has always produced a positive return given enough time.” When the market crashed in 2008, there was a massive sell-off of US stocks. Some investors were risk-adverse and moved their investment position to something less volatile (i.e bonds and GICs), but some benefited from a different perspective. They understood that the loss (or risk) only existed if they sold the investment, because given enough time, they would eventually recoup their losses and go on to even bigger gains. And that’s exactly what happened. It was a rough couple of years, but within a relatively short time the market had fully recovered and grew well beyond the values in 2008. The market, over the long-term, is predictable, and therefore is low risk.

There you have it. Both sides of the coin, or in most cases a 100-side dice. Everyone sees risk, and there isn’t one view that is 100% correct or wrong. Other factors have to be considered, such as time-horizon, investment purpose, and comfort.

So, why did my discussion on bonds make me think of writing a blog post about risk?

Out of all common investment vehicles, risk associated with bonds is highly misunderstood.

Disclosure: Many risks associated with bonds have to do with FOMO (Fear of Missing Out).

Take a government bond. Let’s say it’s a 4%/year bond that has a maturity (locked-in period) of 5 years. This bond would pay you 4% of simple interest every year for 5 years. On the 5th year, they would return your initial amount (called principle). This seems pretty low-risk right? It’s essentially an IOU to the government with an interest payment to compensate you for letting them borrow the money. Most people would go to the common sources of risk, i.e. what happens if the issuer (in this case, the government) goes under? Obviously, in a government bond, that is highly unlikely. But corporate bonds have some risk of bankruptcy. What about interest rate risk? This one’s interesting because it’s rarely talked about.

Say you have a 4% bond. Typically, these bonds are ‘non-cashable’ which means it’s harder to get your money out early if you need it. Let’s say your car breaks down in year 2. You may incur a penalty for getting your money back early, if you can get it back at all. The other option is to sell the bond to another investor. This is where we see interest rate risk.

What happens if you try to sell your 4% bond and the current rate for the same bond is 6%? Why would I (as a potential buyer) pay you full price for a 4% bond when I can go get an identical bond at 6%? This is where we start having to take a ‘loss’. If I can get a 6% bond when you’re selling a 4% bond, I would only buy yours if you’d sell it for a discount. Let’s say the principle of yours is $100,000. I may only pay you $98,113.20 for that bond, because at the end of the bond’s term, I will receive $100,000. That extra $1886.80 compensates me for the reduced interest payments along the way. This hurts you as the seller.

The reverse is also true. If the prevailing interest rate drops to 2%, you can sell your bond and make extra money because someone else wants to make 4%/year instead of 2%. That’s interest rate risk.

What about FOMO? There’s a term out there called the “Modern Portfolio Theory“. Before joining this industry, I had heard about it through movies but never really understood what it was. It was created by a man named Harry Markowitz in the 1950’s and theorized a way of lowering risk while maintaining return. A lot of his original ideas are used as rules of thumb in today’s environment because they have proven to be successful. He build the idea of the “Efficient Frontier“. I hope Star Trek fans don’t get too excited, because if they’re expecting another reboot, it’s not coming from Mr. Markowitz.

The Efficient Frontier essentially describes how to allocate your portfolio to reduce or maintain a certain level of risk while increasing return. From the image above, you can see that as return goes up, between ~6% and ~9%, the risk actually goes down. Hypothetically, a portfolio that returns 8%/year could have less risk than a portfolio that returns 6%. The “Efficient Frontier”, or most efficient portfolio, would then be something that returns ~10%.

These numbers have to be kept in context. The 1950’s supplied a very different market expectation than today, but I want to focus on the relationships between bonds and the Efficient Frontier. Most people look at bonds and consider them to be the lowest-risk option. Alternatively, by only being in bonds, you expose yourself to risk that is inherently linked to bond pricing (i.e. interest rates). Markowitz goes on in his theory to talk about how equity components can lower your overall risk by reducing bond-specific risk and trading it for equity-specific risk. The risk is not necessarily gone, but it has been diversified. In the same way we would diversify someone’s portfolio by geography or sector, we should also be diversifying by risk category. By only being in bonds, you potentially miss out (FOMO) on low risk returns in the equity (stock) market.

There are hundreds of different types of risk, but on contemplating the “Efficient Frontier”, I thought about how risk can be perceived. This article is not designed as an instruction to go and buy stock and add it to your portfolio, because from a holistic planning point of view, it may not be necessary. It is, however, designed to bring to light some previously unknown forms of risk that should be considered if you’re a fellow advisor or a DIYer. For all of the investors who have lived by the traditional theory of more bonds = less risk, I challenge you to “Boldly go where no man has gone before!” (Thanks Captain Kirk!).

The Novice Investor: Cryptocurrency

The Novice Investor: Cryptocurrency

The Novice Investor: Cryptocurrency

However you get your news, it is almost impossible to not hear murmurings of what’s going on in the financial world. For myself, I receive updates from CBC, Globe and Mail, social media, as well as various investment companies. The problem is that everyone has the same story spun a different way. As a reader, it can be tough to untangle the stories and get a good sense of what’s actually happening. It’s as though the news is a pair of headphones (the kind with wires) that you’ve pulled out of your pocket all tangled. With intense focus and precision, you can unwind the complex mess, only to put them back in your pocket to be tangled once again.

So, what’s the point of this article? I simply want to continue tangling earphones.

In all truth, there are certain topics that have hit the investment market that I’d like to address. I hope that this can clear up some misconceptions or terms that most people recognize but don’t understand.

Our first target is cryptocurrency.

Before we dive too far into what cryptocurrency is, I thought we should put it into context.

Cryptocurrency is considered a “Fad” of the 2000’s. Millennials are all wishing they jumped on the Bitcoin train years ago because they would have seen their fortunes made. But cryptocurrency’s infancy takes us back to the 1980’s, when “Digicash” was invented with the goal of creating a non-traceable and de-centralized form of value transfer (learn more here). Over the years it has evolved through growing pains to become a multi-billion dollar network of currencies that range from Bitcoin (the most recognizable), to Dogecoin. The origins of the modern-day Bitcoin are also very mysterious. The publicized paper which started Bitcoin, Bitcoin – A Peer to Peer Electronic Cash System, was written by an entity known as Satoshi Nakamoto. I say entity because they don’t exist. It’s an alias, the real identity of Satoshi is a mystery.

So, we know that since the 80’s people have been trying to develop a method of transferring wealth without having to go through a major bank or disclose private information. In the early days of Bitcoin, this was an open door for terrorism financing and criminal activity to occur without the ability to trace financial transactions. It’s impossible to know for sure, but it’s suspected that in the earlier days, a large percentage of transactions were related to criminal activity.

But… What is Bitcoin?

It’s a figment. It’s a non-tangible, electronic ‘coin’ that has no internal value. It only has perceived value. You may read that sentence and think, “Man, Garrett must not like Bitcoin!” and you’re not wrong, but you’re not entirely correct. I see two main issues with Bitcoin (and other cryptocurrencies):

1. They have no “real” value.

2. They’re traded as an investment and not a currency.

There are other issues that are attributed to my hesitation toward cryptocurrency, but those are the main two, and I’ll go into more detail.

They have no “real” value

Since, at it’s core, Bitcoin is not a real asset, its true value is $0. There is no tangible asset (company ownership, physical property, ect) associated with Bitcoin. Most other assets have some minimal worth. An investment in gold, even if it went to $0, would still leave you with a physical asset that you can touch and feel. At the very least, a gold bar could be used as a shiny paperweight. With Bitcoin, there is no minimum value, and with it being de-centralized, it is un-regulated, which means there is no institution that maintains its integrity. This manifests itself as a higher chance that a cyber-attack or ‘hack’ could leave the investor with nothing.

They are traded as an investment and not a currency

Traditionally, currencies are not held in investment accounts for the purpose of growth. To clarify, when I say ‘currencies’, I’m referring to cash held in an account outside of your equity or fixed income portfolio. They are held for three primary reasons.

First, they allow for the investor to quickly and easily purchase more investments. For example, investors who held cash in their accounts in March of 2020, when the market crashed, were able to quickly put money into the market when stocks were “on sale”. We would call this an “Opportunity Fund”.

Secondly, they are used to hedge risk against inflation. Holding a different country’s currency can see some growth if the dollar in your own country declined. For example, lets say I converted $5 CAD into $4 US. I could hold the US currency with the hopes that the value of the Canadian dollar fell. When it does, I would convert my $4 US back into CAD, at which time it may be worth $6 or $7 dollars.

The third purpose for currency is wealth transfer. This could be as simple as going to the grocery store to purchase food. Every item on the shelf is assigned a dollar value. How would you feel if you went to buy your favorite ice-cream to find out that overnight, the price had increased by 20%? There would be major distribution issues for non-essential materials, which would only be purchased when the price of Bitcoin dropped, and there would be major financial hardships for people buying essential items when prices were high. Bitcoin can never really be a new form of de-centralized currency until it is regulated to the point where price volatility is managed.

For those who don’t understand the concern around centralized currency, you’re not alone. A centralized currency is simply a currency that is controlled by the government (or a ‘higher power’). In Canada, our currency is centralized and controlled by the Bank of Canada. They are responsible for controlling interest rates and money supply, among other things. One of their major mandates is to control inflation, and two major tools they possess to control inflation is interest rates and the ability to print and recall money (money supply).  Bitcoin and other cryptocurrencies have tried to de-centralize this process with the hopes of creating a currency that is controlled by the users, and not by the government. Extreme crypto-fans will go a step further and say that they support Bitcoin because it resets the value of currency. They see the Canadian dollar (or US dollar) as a value of power. For example, in today’s economy, 1% of the population controls a vast amount of the wealth. Some of these crypto-fans support de-centralization because they believe that it will spread out the wealth.

How wrong they are…

This brings me to a THIRD big pet-peeve with cryptocurrency (and bitcoin specifically). It is not uncommon that a fanatic of Bitcoin is also a semi-socialist (specifically in terms of spreading out wealth). The problem with Bitcoin is that it has created a new market. Bitcoin mining is a brand new industry which has become extremely expensive. As a PC gamer in my free time, I saw a huge price jump in the cost of GPUs (graphic processing units) due to people buying all of the supply to build ‘mines’. If you go onto Kijiji, you can search “cryptocurrency mining rigs’ and find lots of different options that have price tags that reach into the ten’s of thousands. In that model, where it costs thousands of dollars to gain access to a production method, how does that differ from capitalism? If the skeptics of capitalism say that its main goal is to separate the worker from the means of production, how is charging thousands of dollars to have access to currency any different? In this world, the top 1% still get to hold all the wealth. In fact, the top cryptocurrency holders are banks and bank owners, specifically owners who got into cryptocurrency exchanges, such as Micree Zhan, who founded the cryptocurrency mining company “Bitman”, or Chris Larson, who co-founded Ripple, which is a new currency of its own. Both of these men were rich well before they got into the crypto market.

So, where does this leave cryptocurrency, and how does it fit into the future?

That’s the million dollar question. It seems like people are ‘betting’ on whether cryptocurrency will either replace or be integrated into the currency our future society. Others believe it is too fragile in its current state to be a real contender to something strong like the US dollar. We could dive into the weaknesses of the US (or Canadian) dollar, but the reality is that our whole economic system is built on the US dollar, regardless of how weak or strong it is.

Since having started writing this article, the CBC posted a story about the international banking system and how it is pushing back against cryptocurrencies for some of the same reasons we’ve discussed. They did however, propose an alternative: “Central bank-issued digital money” (or CBDCs). The advantage of this form of digital currency is that it is supported by the current banking system. This seems like a bad compromise for crypto-fanatics who may see this as another form of centralized currency (which would be correct), but the CBDCs could maintain a transaction’s privacy. For the everyday individual, this alternative would be much more stable, because it’s backed by one of the world’s mega-institutions. At the end of the day, Bitcoin is unstable because there is so much trading. If one entity (or a group of entities) owned a major portion of the currency, individual traders would have a much smaller impact on the ongoing value. It’s the same reason the US and CAD dollar don’t fluctuate drastically on a daily basis.

In My Opinion:

It’s not as easy as saying “yes” or “no” to cryptocurrency. Since the eruption of Bitcoin, there have been a multitude of different variations of cryptocurrency, and there are even more that are in development that haven’t hit the marketplace yet. I believe that cryptocurrency is here to stay, but I don’t foresee it being a major “currency” in the same way as the dollar. As of right now, there are only a limited number of retailers who are accepting various forms of cryptocurrency in exchange for goods. As a business owner, the risk is that you’ll accept the bitcoins right as the value drops. This would cause many stores unnecessary financial hardship, especially while the alternative (US/Canadian dollar) is relatively stable. So, if you’re interested in holding cryptocurrency, the same ‘rules’ apply as with the rest of an investment portfolio.


With hindsight being 20/20, how would you feel if you had bought Bitcoin in March or April of 2021 during it’s huge expansion knowing where it is now? Here’s a reference:

I would safely presume that cryptocurrency will be part of the future, but who knows which version will be the main form in 10 years time? If you want to have crypto as part of your portfolio, I’d recommend spreading your investment over various cryptocurrencies instead of one or two. You may not see the drastic increases in value in comparison to just holding Bitcoin, but you also won’t experience the dramatic fall in value if Bitcoin itself falls. Either way, it’s a bit of a gamble. If you’re going to hold it, don’t put all of your eggs in that basket. Trend-setting investment options often don’t last long. Bitcoin will continue to be a thing until it’s not, sort of like bell-bottom jeans. Somehow they were extremely popular, but now they’re only used as the bottom half of my Elvis Presley Halloween costume. There will always be a new trend, and once the focus is taken off of Bitcoin, it’s anyone’s guess what will happen next.


Amendment: My wife, as she read this over for me, told me that Bell Bottom jeans are apparently coming back into style. Now I get to wear my Elvis costume all year round!

First-Time Homebuyers: Guide to the Buyer

First-Time Homebuyers: Guide to the Buyer

 “To rent, or not to rent?”

That is the question facing a lot of young people today. In my position, I have heard just about every consideration and factor people use to make this decision. The overwhelming comment I hear is “I don’t want to pay someone else’s mortgage”. I’ve said it, and to an extent, I still agree with it.

I have to frame my recommendation based on the bigger picture. The decision is often more complicated than people anticipate. Different factors I consider when helping someone decide on whether they should ‘pull the trigger’ on a house purchase are: cash flow, risk exposure, equity, unexpected costs, and liquidity. Cash flow is by far the biggest consideration.


When I was starting my career as a paramedic in Sudbury, my wife and I entertained the idea of purchasing a house. My views on paying someone else’s mortgage were set in stone, and I wanted to move away from renting as quickly as I could. What stopped us (and I’m glad it did) was cash flow. We had an awesome renting situation and if we were to jump into a position of ownership, it would have made our financial situation tight. We would have had to pull back on other expenses (mainly luxuries), to accommodate the mortgage. In essence, we would be ‘house-poor’.

Risk Exposure

This has to do with your down payment. If you save $30,000 for a down payment, you may feel prepared for the purchase. What happens if you use all of your savings to buy a house, then lose your job or have an unexpected expense? Are you in a position where buying a house means sacrificing your emergency fund? We can transition the conversation to the use of debt instruments (credit cards, lines of credit, etc.) as a temporary ‘fix’, but I think most people would agree that going into more debt is not an ideal outcome.


It’s hard to argue against the investment growth attached to real estate. In MOST cases, real estate grows in value, but we are currently living in a ‘bubble’. The unfortunate thing about bubbles is that they eventually burst. We are strolling into a period of time where home owners are statistically making less (compared to the cost of living), saving less, and in more debt. The idea that a 25 year old can be a home owner on a normal income is becoming less appealing (and more unlikely) because it puts them in a large financial obligation that is unsustainable. This becomes even more apparent in bigger cities like Toronto and Ottawa. I was working with a couple a few months ago and their view on their house was that they would ‘keep it as long as they could’. Building equity is great, but sacrificing stability and flexibility is sometimes too high a cost.

Unexpected Costs

If you’re a renter, you may have experienced the inconvenience of having to call your landlord when the hot water tank stops working. Now imagine if you had to pay for the repair yourself? Stack this on the unexpected costs from lawyers, accountants, taxes, etc. and it can make a manageable mortgage seem overwhelming.


Liquidity is simply the ability to get cash from your investment. If you had to sell everything you own and cash in all of your investments, how hard would it be to sell your house? And would you have to sacrifice the equity you were building to sell it quickly? Today in Kingston, we’re in a seller’s market. When the market shifts, the buyer will hold the power to get the most bang for their buck, and it makes it hard to protect the equity you hope to rely on in the future.

Government Help?

New home buyers may have heard of assistance programs like CMHC (Canadian Mortgage and Housing Corporation) and the government’s First Time Homebuyer’s Incentive. These are offered to help young people buy their first house, because even the government realizes that there is a housing bubble. CMHC fees (1.8-4% of your mortgage) are essentially a mortgage insurance that you must pay into unless you can produce a 20% down payment on your first home. This coverage protects both the buyer and the lender in the event that you can’t pay your mortgage.

The First Time Homebuyer’s Incentive is a bit different. The government essentially steps in and funds 5%-10% of the value of your new home with the stipulation that you pay them back the same percentage when you sell. This means that if you buy a house for $300,000 and they give you $15,000 (5%), you’ll owe them 5% of whatever you sell the house for. A few years go by and you sell the house for $350,000. You’ll also be writing a cheque to the government for $17,500.

There’s always a catch, and with this incentive, the catch is that the government gets to participate in the built-up equity within your home without taking any risk. Whether you sell based on your own decision, or the house is forfeited to the lender, they will get their money back. So the question I get asked is, “When would it make sense to do this”? and it’s a great question!

There are two streams of thought in my mind. First, I try to remember that ‘cash flow is king’. If the 5% from the government allows you to have more flexibility with your cash flow to save and invest, you may come out ahead. This way of thinking holds true as long as you don’t actively put money into your house. For example, if you were to buy the house and take the government incentive, you have created some flexibility with your cash flow. If you were to take your excess cash flow, save it, and use it to re-do the kitchen, you’ve increased the value of the house, and in doing so, the value of the government’s return on it’s investment.

Now there’s also the second consideration, and that is CMHC fees. If you have to pay CMHC fees, your mortgage is subject to an insurance cost of at least 1.8%. Currently, on the CMHC mortgage calculator, the rate is 4%. So, you buy your house for $300,000 and you have your 10% down payment. Whether you take the government incentive or not, you’ll be subject to CMHC fees. On the other hand, if you have 15% on your own and use the government incentive to take you to the 20% threshhold, you’ll end up potentially saving money. For example, a $300,000 house with a 15% down payment would result in a mortgage of $255,000 + $10,200 in CMHC fees (4%). A 20% down payment would save you the CMHC fees and in order to forfeit the equivalent amount to the government’s investment return, your home’s value would have to grow to a value of $504,000 ($25,200 = 5% of $504,000). That result is unlikely, and if it happens, you wouldn’t have much to complain about UNLESS the equity in the house was built on costly home improvements.

What’s the Real Return on Investment?

For math students, think about it this way. Every dollar you put into your house, you’ll repay at least 5 cents (but usually more) to the government. A $10,000 renovation may raise the value of the house by $15,000, of which the government will recapture $750. You still make $4250 in equity, but instead of paying back just 5%, you’re siphoning off 7.5% of your additional investment back to the government.

So, my final thoughts on buying a house as a young adult?

Be smart.

Don’t get sucked into the idea that you “have to own a house by the time you’re in your mid 20’s”. Without wanting to sound disrespectful, it’s an idea ingrained in our minds by an older generation who had different considerations to deal with than we have today. If you want/need to buy a house, be prepared for the reality and expect the unexpected costs that are associated with ownership. If you can take part in the housing market without stretching yourself too thin, it can be a good way to build long-term equity, but it’s not the guaranteed investment it’s made out to be. The fact that the government is increasing support for young buyers is a telling sign that they recognize the unsustainable growth that the housing market has been subject to over previous years. If you decide to buy a house, think about how the different programs and incentives will hinder you or benefit you in the long run.

Purchasing Power: The Effect Time Has on Your Money

Purchasing Power: The Effect Time Has on Your Money

The market is a scary place. If you decide to open up the Globe and Mail to check the daily news, you’ll find a stock market ‘ticker’ sitting smack-dab in the middle of the page. This is the equivalent to vending machines putting the most popular candy at eye level. Right now, with the current market situation, the tickers are often red, and from a psychological standpoint, red is a dangerous colour.

So in times of uncertainty like this, a common reaction is to revert to hiding your money under your mattress. Though it’s not a terrible idea to keep some cash on hand for emergencies, did you know that you are actually losing money by doing that?

Most people think they are protecting their wealth by putting it in a shoe box and leaving it alone, but in reality (and in market terms) that money is showing a negative return year after year. The principle is called the ‘Erosion of Purchasing Power’.

What is Purchasing Power?

Imagine your grandparents (or great grandparents) living through World War 1. 1917 was the highest inflation year in Canadian history at ~19%. What does that mean? The loaf of bread or jug of milk that cost $1 at the beginning of the year, cost $1.19 by Christmas. Inflation is the increased (or decreased) cost of goods and services over a period of time (usually a year).

1917 was an anomaly. We had just come out of the World War, the global economic landscape was changing, and a lot of policies were born out of that period of time. More recently, the government has strictly tried to maintain an inflation rate of ~2%/year.

Now, lets go back to the shoe box full of cash in the closet. Let’s assume that there is $10,000 in the box and it was put aside in 1970 as a way to start saving for retirement. Back in the 70’s, you could buy a house in Toronto for ~$30,000, so $10,000 was a substantial amount of money. The yearly income in Canada in the 70’s was averaging between $5,500 and $7,000/year (based on minimum wage being $2.60/hr).

First off, having $10,000 to put in a shoe box for retirement in the 70’s was a big deal. That was almost 2 years worth of salary. At the time, you could buy 1/3 of a home in Toronto, live without going to work for almost 2 years, or achieve a vast number of other objectives usually reserved for the top 1%.

But the box is in your closet collecting dust. Inflation is slowly raising the price of goods and services around you and you forget about the cash. Fast forward to 2020. You are ready to retire. You suddenly remember you stashed this great wealth in your closet and you go to collect it. Sadly, you see just $10,000 in a box.

The loaf of bread that cost $1 now costs $4. The land alone where you could have bought the $30,000 house is worth $800,000+.

Your $10,000 will afford you a nice vacation, but doesn’t come close to the basic income needed for a family to survive. The power that you had to purchase goods with that $10,000 has declined dramatically over the 50 years that it sat in a box.

How do you avoid inflation?

Short answer is that you can’t. Inflation is a result of a variety of factors including currency value, debt load, import/export ratios, interest rates, and taxation. The good news is that it can be counteracted. The new equivalent to a box in the closet is GIC’s (Guaranteed Interest Certificate). They are the ultra-low risk investment that will help your money keep pace with inflation.

But do you want all of your money to keep pace with inflation, or would you rather take some risk and have the land worth $800,000?

The Three Bucket Approach

This is some free advice, and I use this template with a lot of clients because it quenches many of their hesitations and concerns.

Imagine you have 3 buckets, and all of your savings will be in one of those 3 buckets. The first bucket is your bank account or cash in the shoe box. Its purpose is to provide a source of cash that can be accessed quickly in case of emergency. If you need to book a quick flight or get a repair on a car, this is where you turn to first.

Side Note: Many people accept credit cards as their “quick access” solution, but that more often leads to major debt problems.

The second bucket is your short term goals. The goals themselves are dependent on you as an individual, but the idea is to provide quick access (liquidity) while obtaining some growth for the future. often this bucket contains a portion of their emergency fund. It allows your emergency fund to reflect the changes brought on by inflation.

The third bucket is your long term goals. For some people, there would be very little change in how your long term and short term goals are invested, but generically, you can afford to accept more risk when you have a longer period of time. Higher risk should result in higher returns.

This approach is a foundational piece to people’s investment strategy, and a key deterrent to the erosion of purchasing power. For perspective, if the $10,000 from our shoe box simply kept pace with inflation (a non-adventurous goal), it would be worth ~$68,162.86. Back in 1970, $10,000 gave you options. In 2020, $10,000 doesn’t reach as far or present the same opportunity.

Now if we translate the conversation towards the future, what kind of freedom would you have if you let your money’s purchasing power erode? Are you helping your ‘future self’ accomplish their goals? Planning for the future is more than putting money into a box. It’s asking yourself: how will this money impact my family’s quality of life down the road? Do you want to see the opportunities diminish with time, or know that when the time comes, you’ll have to tools available to take advantage of whatever comes your way?

The Novice Investor: Piecing Together Your Investment Vehicle

The Novice Investor: Piecing Together Your Investment Vehicle

Investing… Stocks… Bonds… Mutual Funds… Markets… Internal Rates of Return… Value versus Growth Investing… ESG Investing… Portfolios… ETFs… Savings Rates… Risk Profiles…

There is so much out there when it comes to the parts and principles of investing that it can be hard to digest. On one hand, we are told to invest, and on the other, we are told to not do anything without knowing what we’re doing. That ideology can force a rift in people’s planning and cause them to be idle. I have had clients who sit on tens of thousands of dollars in their bank account, and most often the reason is that they don’t understand their options.

The richest men in the world have built their fortunes by having multiple streams of income. Jeff Bezos, the founder and owner of Amazon, is currently the richest man on earth. If we looked at his income strategy, you would see multiple inflows. First, he has his salary from Amazon. Secondly, he has his Amazon shares that increase in value as the company grows. Third, I imagine we would find that he has money tucked away into shares of other companies, which are also growing. All of these sources accumulate to roughly $2500 per second in income (from “The Registered Citizen”).

Especially with the current ongoing crisis, there are lots of headlines that say you should stay away from the world markets. Oddly enough, you can often find a link nearby that will tell you how to setup a ‘side-gig’ from home to earn more money. Each person has a unique situation, and in this post, I would like to explore how you can design your own secondary income streams. I will be using the analogy of a car, as it makes it easier to conceptualize investment components.

First, I would like to define the difference between ‘Active’ and ‘Passive’ income. It’s pretty self-explanatory, but active income (also known as “earned income”) refers to income you have to physically make. This would include going out to a job and getting paid a wage/salary. Passive income on the other hand is income gained for you by others. Investing falls into the category of passive income.

For the purpose of simplicity, I will speak in terms of mutual funds (which I will define later). Investing can be broken down into two parts: Equity and Fixed Income.


Equities, also known as stocks, are the engine of our car. To have ‘equity’ in something is to own it. For example, Jeff Bezos has equity in Amazon because he owns shares (or stock) in the company. As the company increases in value, the market price of your shares increases. This means that every time you purchase something on Amazon, not only does Amazon’s revenue increase (which increases Jeff Bezos’s salary or bonus), it also increases the value of the company, therefore increasing the price of each share.

It doesn’t necessarily have to be companies. There are some investments that hold their equity in other areas, such as gold. In this case, the fund manager will buy gold, and sell ‘shares’ of the gold on the open market. As the value of gold increases, the value of each share also increases and people can sell their shares for a profit. 

Equities can define how fast and how long your car will run. Within equities, you can dive into asset qualities and other specifics that can be as different as the electric engine is to a V8 supercharged sports car’s engine. Equities give us the power and growth potential we need to earn our passive income.

Fixed Income:

Fixed income (also known as ‘bonds’) are the safety features of the car and this form of investment is far simpler than equities. In every sense of the phrase, it is an “IOU”. You, as the investor, are lending money to governments or companies for them to use in their operations. This is a lower risk and lower reward strategy for investing. The company or government gets a loan, and you receive a regular interest payment. For example, if you were to lend Amazon $10,000, they would pay you an interest payment (i.e. 1.5% or $150) either annually or divided monthly and return the $10,000 balance at the end of the term.

One common factor you’ll often hear about bonds is related to the interest rate.

If we paused time and looked at interest rates now, we would see a sharp decline in a new bond compared to 1 year ago. This is because the Bank of Canada (along with other country’s banks) have dropped interest rates in an attempt to stimulate the economy. Interest rates play a large role in the ‘risk’ associated with a bond, but that analysis is for another post.

Traditionally, bonds are a much safer way to invest, as there is little risk of a government or company not honouring and paying that debt back, but it also carries a lower reward. Your $10,000 does not participate in company growth in the same way equities do.

In regards to it’s relationship to our car analogy, with fixed income being the safety system, bonds protect the car as it moves. If there was an event that was cause for concern (for example, the markets dropped in value and you were unable to go to work), the fixed income component would preserve a portion of the investment to limit the damage.

The whole purpose and the relationship between equities and fixed income is to get you from Point A (where you are now financially) to Point B (retirement, first house, education, etc.). This is where mutual funds come into play.

Mutual Funds:

What are mutual funds?

Again, by their name, it is easy to guess that they are a funds designed to be invested by multiple people pooling their money toward a mutual goal. There are lots of different types of mutual funds. For example, there are funds designed for people who want to invest in certain parts of the world, different industries, or even subject to certain moral or ethical standards.

At it’s core, a mutual fund is a makeup of equities and/or bonds that provide growth opportunity while minimizing the downside potential. Since everyone’s risk tolerance and time horizon is different, finding the right mutual fund (or funds) to invest in takes more thought than most people would imagine. If you are considered ‘high-risk’ you may want a mutual fund that holds more equities than bonds. Vice versa, if you were closer to retirement and wanted to preserve your investment, you would lean toward a higher allocation of fixed income and safety.

Common Question: How is this better than buying individual stocks?

Quick answer: it depends. Do you have the time?

A long time advisor once shared an analogy with me that I thought was powerful. Unfortunately, it is highly visual, but I will do my best to paint the scene.

Diversification is one of the main strategies used by mutual funds. Imagine you have a pencil, and that pencil represents a stock. It can be any stock you’d like, but it is one single stock. You have heard that this company has a strong future and will grow in value for you, so you ‘get in at the ground floor’, and invest everything into that company. Now, fast forward in time. We have an event such as the recession of 2008, the tech bubble of 2000, or the current COVID-19 crisis. That company is put under financial stress, as this is an unforeseen position and the world is rapidly changing. Some companies are able to adapt and survive, and others can’t change fast enough and are forced to shut down. A real example of this may be the loss of mega-companies such as Sears. Sears couldn’t adapt to cater to the online shopper and subsequently ‘died out’. Any stock that Sears had is worthless today.

bunch of pencilsSo… take your imaginary pencil and bend it. Imagine that you bending the pencil is the company going through a stressful period. Does it snap? Maybe not, but you, as the share holder, are not protected from the companies failure. The money you invested could be gone.

Now imagine you have a box of 50 pencils, each pencil still representing a single stock. You take them out of the box, you strap an elastic band around them, and you try to bend them all together.

They don’t break so easily.

The difference between trying to buy individual stocks and buying a mutual fund, is that the mutual fund offers greater diversity and protection from market fluctuation. Theoretically, you could go out and buy 50 individual stocks and manually create your own diversification, but most people would find it takes a lot of work to purchase, research, value, sell, re-balance and execute a specific investment strategy while also earning income at their own career. The mutual fund offers a much simpler solution to investors and can create a stream of passive income.


The value of not putting all of your eggs in one basket is that you are more protected from a depressed market. A crazy and unexpected event occurs and some of the companies feel the stress, but even if one company falls to the wayside, your portfolio is held together by the remaining mix of equities and fixed income.

Creating passive income can be more than working a 9-to-5 career and investing in mutual funds, but investments are a staple in most successful people’s financial structure.

I want to circle back to my original analogy.

A car has a single purpose. The kind of car, how fast you drive, and where you are going is up to you. But at the end of the day, the car’s role is to transport you from where you are now to where you want to be in the future. If you start your journey without enough gas in the tank or with worn out tires, you are putting yourself at risk of stalling or having problems down the road. Like an investment strategy, a car with proper care and maintenance will ensure you eventually reach your goal.

Proper investment strategies can provide peace of mind when traveling down life’s roads. You never know when there will be an unexpected twist or turn, and being prepared is a key to success.

What Lies Ahead…

What Lies Ahead…

As I prepare for each week, I like to do my own recap of the markets. I look at trends over the last week and scale it back to the month and quarter to see how the big picture evolves. Even though everyone is linking the market depression to COVID-19 (which is fair), I thought it would be an interesting opportunity to look at the previous market fluctuations and evaluate how this one compares.

I found a great article from Forbes that breaks down different recovery patterns, and I thought this would be a good place to summarize it and give my impressions.

There are four common shapes to describe market recoveries. The “V”, “W”, “U”, and “L”. The “V” and “W” are the most common, because the “U” is really a variation of the “V”, and the “L” is very uncommon. But let’s start in alphabetical order.

The “L”

The “L” is associated with a worst case scenario. As the shape implies, there is a sharp drop in the market which doesn’t recover, or at least takes a long time to transition to an upward trajectory. This shape hasn’t been seen in a long time, but most recently appeared in the 1990’s in Japan, known as the ‘lost decade’.

The “U”

If we look backwards in time, we’ll see that the “U” shape was a part of some of the bigger market events. It depicts a downward movement followed by a “bottoming out” period. This shape is seen through the Great Depression, as well as some of the market events in the late 1900’s. The “U” illustrates an economy that has declined without an individual stimulus of recovery. It leads to a slow incline in the valuations of the market rather than a stark climb.

V shape graph of market recoveryThe “V”

The “V” is a more common variation of recovery. It represents a sharp decline and a quick ascension back to original (and most often higher) values. It is more likely that the contraction and expansion are a result of an outside factor. For example, in 1952, when the market was still ‘booming’ after the Second World War, the US Federal Reserve raised interest rates in the anticipation of disproportionate inflation. This caused a “V” recovery from Q4 1952 to Q1 of 1955.

W Shape Market RecoveryThe “W”

Most people who are preparing for retirement remember the crash of 2008 vividly. The Lehman Brother’s went under and the economy fell in hot pursuit. Hindsight being 20/20, we can see the market crash of ’08 as a representation of a “W” recovery pattern. In the late stages of ’07, there was a relatively small and quickly resolved market depression followed by the major fall halfway through 2008. The minor correction combined with the major event form a “W” pattern.

So, what does this tell us?

Having knowledge about the ABC’s (or rather UVW’s) of market recovery is only helpful if we can apply it. Unfortunately, we can’t see a pattern until after it has appeared and it has joined the rest of the recoveries as part of our history. That being said, we can look at the behavioral patterns of people and how the COVID-19 pandemic varies or resembles patterns seen before/during previous market disruptions. Experts would agree that the market behavior would best point toward a “V” or “W”, but only time will tell. The rational for the “V” is that once we are allowed to mingle in public again, people will return to stadiums and restaurants, causing a quick surge of money flowing in and out of the economy. Specialists fear a “W” recovery if governments re-open the economy too soon. The news has mentioned the idea of a ‘second wave’ of Coronavirus stemming from healthy individuals returning to ‘normal’ and interacting with asymptomatic people. This would cause a second impact of new patients in hospitals, and see governments re-think their strategy, having potential economic consequences.

If we self-isolate and flatten the curve, a “U” shape could emerge. This would be caused by a slow and strategic introduction of economic stimuli. It could be even more pronounced if people were to be skeptical at first. Imagine the governments fully opening markets trying to create a “V” response. People are still fearful and decide to continue the limitations on their interactions. This means there is a slow and steady increase to economic activity rather than an ‘opening the floodgates’ response.

All that being said, we can’t predict what the market will do. People have been trying to time the markets for decades. And some have made careers out of it. It will be interesting to see how this plays out. I imagine that whichever way it pans out, this will become a unique lesson for us all to learn from.