On a recent reading of the business news two very prominent economic forecasters offered wildly opposing views of what is coming for investors in the next 12 months. One or both of them will be wrong but either way it can sow the seeds of confusion in investors, which is also exactly what happened back in 2008.

We have saved copies of the Globe and Mail from 2008 when many prognosticators called for the imminent collapse of financial markets and economies thanks to the financial crisis. Naturally nothing that dire came to pass – it never does, and of course we now know how the story unfolded as we have the clarity provided by hindsight. However, the future is always hazy and uncertain.

How then does one simplify their investment life knowing that most of what masquerades as news is simply a distraction? More importantly, as parts of our life such as family, business, and day to day living in general can introduce complexities, how does one invest sensibly?

We have three simple suggestions:

1. Diversify your wealth by strategy

• Liquid cash for expenses and surprise emergencies
• Investments that pay current income
• Investments for growth for the long-term

2. Diversify your wealth by time horizon

• One to two year needs stay in cash with current interest rates of 5%+¹
• Fulfill your income needs with capital not required for two to three years, or longer, by using the Income Note Strategy with potential monthly interest payments that are currently up to 10%²
• Meet your long-term income and growth needs with dividend paying equities and allow them to fluctuate (think businesses you use or impact your life indirectly like grocery stores, banks, railroads and pipelines)

3. Think about the net effect of tax consequences³

• As great as it is to make 5% on your short-term cash, that is only around 2.5% after tax if you are a top tax bracket income earner
• From a net of tax perspective, as investors, it’s favourable for our long-term money to earn dividends and deferred capital gains than interest income. Even 5% in dividends and capital gains would give you 50% more return after tax than interest income of 5%
• Most people would rather pay the government less and keep more for their family or favourite charity!

 

 

Following this simple plan means you do not need to forecast (no one can successfully do that) so you can deal with life and its constant uncertainties with confidence knowing you will not be forced to sell when things come up as you will have proper cash reserves.

The key to navigating what is always an unknown future is to control what you can - your emotions, spending level, saving level, debt levels and the need for an emergency fund. Time and patience can then work in your favour.

Randy & Ian

 

1. Purpose High Interest Savings Fund (As of September 18, 2023)

2. Source: R&R Investment Partners. Historic weighted coupon received. These calculations and projections are for demonstration purposes only. They are based on a number of assumptions and consequently actual results may differ, possibly to a material degree. 

3. Projected rate of return over one year with an assumed 50% tax rate and assumed effective tax rate of 25% on dividends, although it will vary by province. Interest income assumes a portfolio allocated completely to an income bearing instrument yielding 5%. The dividend/capital gains portfolio assumes the 5% return is prorated 50% to the dividend yield and 50% to capital gains. These calculations and projections are for demonstration purposes only. They are based on a number of assumptions and consequently actual results may differ, possibly to a material degree.