The Contented Investor

Over the years a number of our readers and program participants have asked me—as a millionaire at 50—what I would do differently if I were to do it over again. That is a big, involved question and after thinking about it for more than a decade, I thought writing this article would be the best way to answer it. This report is not about me but my learnings and beliefs about how I would describe ideal practices of the mythical contented and successful investor, who I call Will Gardiner.

Know Yourself

The basic personal needs of our Contented Investor, Will Gardiner, have been a determinant of his investment goals, strategy and success to his present age of 57. These universal needs for safety and security, belonging and acceptance, and recognition and power are well balanced for Will’s contentment and investment success. In general terms he is 20% a Cautious Obliger, 20% a Friendly Helper, 40% a Logical Thinker, and 20% a Strong Achiever. One size does not fit all but Will does not sit around procrastinating about barely managing inflation bonds or push around trying to catch hot stocks.

First Investment Course

When Will was 25 and married with a daughter, his father suggested he attend an investment course for beginners being given by his father’s broker. Will and his wife, Mary, attended and came out of it with two learnings – the magic of compound interest and the value of no procrastination and investing immediately with one secure blue chip stock. This was 1983 and both he and Mary invested in Bell Phone. Mary ordered a ‘board lot’, misunderstanding this new term. She after learned she had to sell most of it back as they could no way afford it and were soured on any further stock investing. The course, while generally difficult to follow, did perk an investment interest in Will and helped to get him started.

Investment Goals

About the same time as they took the investment course, Will and Mary had been talking about their financial situation and some security such as a nest egg of savings and life insurance, at least for Will. Their new baby had increased their expenses and they were striving to be prudent and frugal, hence they agreed that security for the family was the number one financial goal. Number two was closely related as it was to create wealth for family security including in addition to basic survival needs, health and education. The third goal was to create wealth for comfort, enjoyment and a satisfying retirement.

The Investment Plan

The plan that emerged from their goal setting was to start a regular ‘nest egg’ savings fund of 10% of their earnings a year and only borrow against it until it reached a value of a million dollars. They were unsure of what the future would bring or what inflation would do to retirement needs but thought the 10% of income would reflect inflation and income ups and downs. On reaching the million dollar goal, they could review inflations devaluation of it and consider using some of its dividend payments for increasing lifestyle enjoyment while keeping the capital intact. They also agreed that they would both sit down twice a year and review how they were doing with a readiness to make modifications. This plan achieved its purpose, made the million dollars, and is still in use.

Investment Strategy  

Will and Mary started out with no clear strategy other than the assignment from the course to ‘get started now and with something that you know that was tried and true’. After Bell Canada and the ‘board lot’ fiasco, they started saving up for a house. With help from parents, they were able to buy one the next year. It was one of the best investments they ever made as were the next two they bought.

A comprehensive strategy emerged later when Will took a year off to get a Master’s Degree in guidance and counselling. He spent a lot of time in the library and was able to read up a fair bit on financial planning and investments. It was the Trudeau years of high inflation (18-20%) and bonds, preferred shares and mutual funds were doubling money in five to seven years. These investments fitted perfectly into his personal needs as a ‘Friendly Helper’ going with the flock to create wealth and be a ‘Logical Thinker’ – an enjoyable combination. He wanted to be a do-it-yourself investor but found it helpful and reassuring (his security need) to get information and suggestions from an investment broker.

The technology crash a decade later brought his ‘Logical Thinker’ into the driver’s seat. The Money Letter, The Financial Times and especially David Stanley’s “Beating the Toronto Stock Exchange” articles in Canadian MoneySaver were resources that helped. He modified his strategy, dropping most bonds, all preferred shares and most mutual funds. He moved to a portfolio of diversified, balanced holdings featuring blue-chip stock he knew with high dividends that increased annually.

Diversification, Evaluation And Balance

Will’s Master’s degree was completely funded by the government’s mental health grant and his new job as chair of the high school guidance department increased his salary quickly to $ 80,000 and he had real money to invest. His ‘Logical Thinker’ had him doing his investment homework and twice a year he did comparisons with the TSX index earnings and adjusted his holdings.  

He was well informed about the need for diversification but believed the media and experts’ insistence on complete diversification and balance was overblown and could be counterproductive. He continued to invest in what he knew and only adjusted with his buy-and-hold strategy and used five years as his focus. When the media went all out on international investing he checked several of his Canadian stocks and found that 50% or more of their investments were in foreign countries. He thus avoided foreign exchange, taxes and political shifts in foreign economies as well as companies he did not know. He also got the tax reduction for his Canadian dividends.

He was barely impacted by the technology meltdown as his only tech holding was the Northern Telecom part held by Bell Canada that he continued to own. The 2008 recession did not affect his portfolio more than a few dollars for while two of his stocks cut their dividends, two stocks raised them.

The Gardiners’ diversification continued over the next few years as they bought several acres of lakeshore property as two adjoining but separate lots. They camped out in a tent for two years and then built a cabin on one lot and put in hydro and water. They kept the other lot as an investment or for the kids’ or grandkids’ possible use in the future. As waterfront lots and cottages rapidly increased in value, they added more value with a sleeping cabin, a large dock, boathouse and ramp, and large parking area. They also winterized their cottage and started using it in the winter for skiing, ice skating and ice sail boating. It was all a very good investment and pushed their nest egg’s value to over the million-dollar goal.

Asset Allocation

Will shifted the family assets around considerably as the economy and investment products changed and made the shifts based on their wealth creation and security strategy. He moved out of fixed income as their rates fell in half and divested most of the mutual funds as his own choices continued to beat most all of them. He tested inflation-based fixed income (briefly), liked several trust companies, thought Exchange Traded Funds were good (but he was usually beating their averages), and went overboard with the capital half of split shares to reduce and defer his taxes. His majority of holdings stayed with his high dividend increasing every year, blue chip Canadian stocks that he knew.

The allocation of where his assets were held did change. The ’08 recession convinced him of the downside of RRSPs when many of his older family and friends lost considerable money with the mandatory withdrawals of the fallen value of holdings and no tax reduction credits for capital losses, or dividends. He experimented with electronic investing briefly but stayed with his regular broker who had been quite helpful as he was getting started. The advent of Tax Free Savings Accounts recently was maximized immediately for all his family.

As Will is pushing 60, he and Mary reviewed their retirement situation with a great deal of comfort and satisfaction. He strongly believed the family should have the same income, indexed to inflation, in retirement as before retirement. He was concerned about health and education costs for the family that now included three grandchildren plus retirement homes and hospitalization. Inflation had also reduced the purchasing value of their nest egg by over half since its start. With Will’s generous school pension and payments from their investments they were well fixed for retirement and security for the family.

When Mary raised the retirement allocation question, she mentioned the rule of age ‘the fixed income percent of holding should equal your age’. Will laughed at that as an outdated, over-cautious, maybe counterproductive belief. Will knew of a recent study showing present-day senior citizens had over half their financial holdings in fixed income – thus in dire financial straits now and for the future. Their 3-5% returns were barely covering their basic and constantly increasing living costs. In reviewing their own allocations they were 10% fixed income, 40% house and cottage, and 50% stocks—mostly Canadian blue chip plus some exchange traded funds, investment trusts, and a couple of mutual funds.

Taxation

It was obvious to Will after his early research that taxation would be a most important determinant of wealth creation. The media were always pushing the buying and selling of stock and rarely talking about taxation. Will found a few excellent sources of up-to-date taxation information and read up on those that applied to his family situation and investments. Every year he also tracked the new rules including the changes in tax credits that decreased the money left for his pocket.

Will’s first move to gradually reduce his taxes by 50% was to divide his income with Mary who rarely had much taxable income. He paid all the family bills including Mary’s income tax, if any, made yearly contributions to his wife’s RRSP and his daughters’ RESP, and maxed all Tax Free Accounts when they became available.

The second move was to differentiate among the sources of income and adjust them as the tax brackets and his income changed. Knowing the tax credits awarded to dividends and capital gains, he reduced his dividend stocks when they were taxed more than capital gains stocks earning about the same amount. For example, in 1988, the top tax rate for capital gains was 30.8% and Canadian dividends 31.2%. In 2014 capital gains were 24.8% and dividends were 32.8% making capital gains more attractive dollar for dollar. For mid-income investors in 2009, dividends were taxed at 6.9% but in four years the rate had gone up to 13.4%. This relatively unnoticeable tax hike was made by reducing the tax credit on dividend income. Will was now good at spotting these obfuscating moves of the federal and provincial governments and made the adjustments to minimize the effect on his portfolio.

Many of these adjustments made to reduce taxes were to defer taxes for as long as legally permitted by Revenue Canada. Will bought split shares of his blue-chip stocks that just held the capital half of the regular shares and the stock issue lasted for five years. At the end of the five years the issue could be rolled over tax-free for another five years and he could then use the usual tax money to make more investments and increase his wealth creation while lowering the tax brackets for his other income. This deferring of taxes is part of the ongoing advantages of capital – there are no taxes paid until you decide to sell the stock.

Will and Mary used the best place possible to start with not only deferring tax on investments but not paying any tax ever by buying a house shortly after their marriage with help from their parents. As mentioned previously, the three houses they bought were likely among the top investments they ever made. The relatively new Tax Free Savings Account also have this money-saving feature as they have no tax on yearly earnings or on eventual withdrawal. Real estate, gold coins or bars, art work and other collectables also defer taxation until they are sold and the Gardiners’ lakeshore lots and cottage fits into this tax deferment category. Will noticed that the 40% of his wealth in house and cottage saved 4.5% in taxes every year by keeping his income in a lower tax bracket. He and his family are quite content with the results and outcomes of his investment career.

Comments on the Quick Quiz

My personal opinions on the quiz are that the contented investor would answer yes to all the questions. If $10,000 would make a significant change to your lifestyle, it is unlikely that you are contented and perhaps concerned about the present recession or financing your retirement. If you were following David Stanley’s “Beating the TSX” articles in MoneySaver, you could manage his 10 stocks in 3-4 hours each year and average well over 10% a year earnings. Most couples can reduce their tax to 20% of income by splitting income and other moves when they do their own tax planning and returns [see Moneysaver, 6/13 P.8]. A clear indicator of the contented investor is having a money-making hobby or recreational pursuit as it shows a relaxed, fun and enjoyment attitude towards investing. (Now if you are uncomfortable at this point I’d suggest you review the Know Yourself paragraph. And remember these are just my ‘doing it over again’ opinions from my experiences.)

Hedley Dimock MA, Ed.D. Guelph, ON

hdimock@teksavvy.com