Tuesday, June 30, 2009

Tax Planning Strategies for Retirees

It sucks getting old. Not that I would know. However, my children seem to delight in reminding me (and my wife) of how OLD we are. It reminds me of a couple bumper stickers you see on cars belonging to "older perople".

I'm spending my children's inheritance.

Live long enough to spoil your grandchildren.

Gratefully, the federal government has taken leave of its senses over the past few years. Tax rates have been reduced for the population as a whole, but no segment of society has benefitted as dramatically as those who have reached the Golden Years. You may not be fully aware of the impact but here goes.

In addition to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs, the government has taken steps to ensure that senior incomes are taxed at lower and lower rates. Here is a brief rundown on some of those steps:

  • Age credit at 65 - for 2009, everyone gets the basic personal exemption of $10,320 but once you reach age 65, you can earn an additional $6,408 before you pay any taxes.
  • Pension income tax credit. The first $2,000 of pension income is tax free after age 65. For those with qualifying pension income, the fiirst $2,000 is tax free before age 65. Even if you don't need the money, this is beneficial. You could recontribute the money back into your RRSP or move it into a TFSA (tax free savings account).
  • You are able to allocate up to one-half of your income that qualifies for the existing pension income tax credit to your resident spouse/common-law partner. This will usually result in greater after tax income from your retirement plans.
  • Age tax credit. If the recipient does not need all of the age 65 tax credit in order to reduce his or her tax payable to zero, the unused portion can be transferred to a supporting spouse.
  • Disability tax credit. The disability tax credit can be transferred to any supporting relative. The strange fact is that many seniors may qualify for the Disability credit but don't know it. Something as simple as pronounced hearing loss may save you thousands of dollars.
  • Buy a GIC from a life insurance company. If you do not have any qualifying pension income, are age 65 or over, and do not want to draw down your registered assets at this time, simply purchase a GIC through a life insurance company because the interest is considered eligible pension income.
  • In additon, there are several other ways to reduce taxable income once you retire. For RRIF's:

    • If your spouse is younger than you are, you can base your RRIS withdrawals on your spouse’s age, thus reducing your minimum annual withdrawal.
    • If the RRIF has been set up prior to December 31, consider postponing the first withdrawal to the subsequent calendar year, thereby deferring income to the following year.

    • In the case of a spousal RRSP being converted to a RRIF, ensure withdrawals do not exceed the minimum required for the first three years. This should serve to avoid attribution back to the contributing spouse.

    Another thing you can do revives a product that is not mentioned that much anymore. With the current low interest environment, people who rely on interest income are finding it difficult to manage. Why not an insured annuity strategy. An Insured Single Life Annuity is the unique concept of purchasing a single premium prescribed life annuity with little or no guarantee period to generate income for a person's lifetime. This kind of annuity on its own does not provide any estate benefit but it produces the largest amount of monthly income of all the forms of life annuities. For estate purposes, the annuitant uses some of the income from the annuity to purchase a permanent life insurance policy, normally for the amount of the annuity. The insured single life prescribed annuity ensures the annuitant a high after-tax income during his/her lifetime and the insurance protects the annuitant's capital while providing an estate benefit for his/her spouse or children. Compared with traditional income-generating investments, insured annuities offer distinct advantages even when compared with the most conservative of investment vehicles. The payments from the annuity are not fully taxable (assuming the annuity was purchased with cash), and the "effective rate of return" for these plans is often 7% to 8%.

    Another way to save on taxes (assuming you have excess cash) is by lending money to family members. Providing you charge interest on the loan at the rate prescribed by the CRA — or at the current commercial rate (whichever is lower) — you can avoid attribution back to you for income earned on the money lent. This interest must be paid to you by January 30 of the year following the year the loan was made and will be taxed as your income. The family member will be taxed on the investment income but can deduct the interest paid on the loan. This is an especially attractive option right now due to the low interest rate environment. The loan rate is set once and remains there forever. As of April 30 2009, the prescribed rate was an astronomically low 1%.

    A more complicated and risky venture is to "melt down" your RRSP's and/or RRIF's. This is a very aggressive strategy and it is not suitable for all investors. Before considering such a strategy, discuss it with the qualified financial professional that normally assists you with your financial planning.

    Here's the strategy: Borrow a bunch of money, say $100,000, and invest it in stocks or mutual funds in a non-registered savings plan, to yield you a stream of capital gains into the future. That will cost you about $4,000-$6,000 a year in interest, at today's low rates. Now, to pay that interest, remove the same amount of money from your RRSP or RRIF. The withdrawal is subject to tax, of course, but meanwhile the $5,000 in interest on your investment loan is 100% deductible from you taxable income. This means you face a $5,000 taxable withdrawal but enjoy a $5,000 taxable income deduction -- for no net tax. The consequence is that you establish a $100,000 investment portfolio outside of your RRSP to give you low-taxed capital gains, while financing this from your RRSP or RRIF. This is a worthy strategy for those with too much inside a registered plan, or for seniors who hate giving up half their RRIF payments to Mr. Flaherty.

    As always, Stay Well and Pay It Forward.

    Friday, June 26, 2009

    Employment Versus Self Employment

    Every now and then I try to pass on information from "other sources". This entry was stolen from a great article I ran into on the net. More people are now "self employed" than at any point in history and the trend does not appear to be about to change. This explains some of the pros and cons of such a relationship.

    Alex recently lost his job with a local plumbing company. After several weeks off, he was approached by a competing firm, Charlie's Plumbing Agency, with an offer for his services. The offer was an interesting one — Alex could choose to work as part of a contract of service, or he could enter into a contract for services. In other words, Alex was given the opportunity to become an employee of the firm, or he could choose to offer his services as a self-employed contractor.

    Alex considered the following pros and cons to self-employment (and by self-employment we're referring to a sole proprietorship as opposed to an incorporated business):


    • broader range of deductible expenses business losses are deductible against any form of taxable income, including investment income
    • business income is not subject to withholding tax
    • no requirement to pay employment insurance (EI) premiums
    • flexibility in work schedule


    • ineligible for employment insurance benefits
    • normally required to collect and remit GST/PST/HST/QST
    • quarterly tax payments are generally required
    • double CPP/QPP premiums required; Employees pay roughly $2,100 in CPP premiums each year. Self-employed individuals must pay roughly $4,200

    Alex found the offer intriguing. He has friends who are self-employed and regularly hears about the broader range of deductible expenses and the ability to offset other forms of taxable income with business losses realized from time to time. To Alex, the offer seemed to be the perfect one — he could realize the benefits of self-employment, but would take on little to no risk, as the firm was willing to provide all required tools and equipment, and would assume the risk associated with the work performed. In return, Alex would be restricted to working only for Charlie's, and his hours would be defined and monitored by the company.

    Alex accepted the contract for services, and with agreement from Charlie's, was classified as self-employed. Two years later, his status was challenged by Canada Revenue Agency (CRA), his tax returns for the previous two years were reassessed (resulting in interest and penalties for denied tax deductions), and Charlie's Plumbing Agency was required to pay two years' worth of employment insurance premiums (and interest) based on Alex's employment. What went wrong?

    The CRA has stated that workers and payers can set up their affairs as they see fit; that is, the question of employment or self-employment is up to the worker and payer to decide. There is a caveat, though — the worker and payer must ensure the status they have chosen is reflected in the actual terms and conditions of the employment. As attractive as self-employment might seem for those with the potential to deduct work-related expenses, adopting this status in the absence of supporting working conditions can lead to interest, penalties and time lost through a CRA audit. When assessing a worker's employment status, the CRA asks questions to verify whether the intention of the parties is reflected in the facts. The questions generally relate to the following:

    • the level of control the payer has over the worker
    • whether or not the worker provides tools and equipment to do the job
    • whether the worker can subcontract the work or hire assistants
    • the degree of financial risk taken by the worker
    • the worker's opportunity for profit

    Answers to these questions help define whether there is a contract of service (employer-employee relationship) or contract for services (self-employment relationship). These points are further explained below.

    Control is the ability, authority or right of a payer to exercise control over a worker regarding how work will be done. Because Alex's hours were defined for him, and because he was restricted to working only for Charlie's Plumbing Agency (i.e., he could not acquire and work on multiple contracts at the same time), his relationship with Charlie's suggested one of subordination. In a self-employed situation, contractors generally work with little supervision, are free to define their own hours, and can provide services to different payers at the same time.

    Tools and equipment
    The investment in tools and equipment is significant in determining employment status. A worker who has invested in tools and equipment is likely to retain a right over the use of these assets, diminishing the payer's control over how the work is performed. Self-employed individuals normally provide their own tools and equipment, whereas employees are generally provided with these assets. Because Charlie's provided Alex with the tools needed to do his job, an employer-employee relationship was implied.

    Subcontracting work or hiring assistants
    Where a worker has the ability to subcontract work or hire assistants, his or her chance of profit is impacted and there is a risk of financial loss — a situation typically associated with self-employment. Employees are generally restricted from hiring replacement workers. In his employment contract, Alex was required to perform all services himself and was not permitted to hire assistants. This implied an employer-employee relationship.

    Financial risk
    Employees generally do not incur financial risk. Self-employed individuals can incur losses through expenses such as tools, equipment, office space, advertising and unfulfilled contract obligations. Unlike employees, self-employed individuals are not normally reimbursed for these expenses. Alex's contract was a simple one: he was to be reimbursed for any expenses incurred, and his contract had no end date. In other words, his relationship with Charlie's Plumbing Agency was to be one of an ongoing nature, saving him the costs of advertising. Also, any liability resulting from the work performed would be a liability of Charlie's Plumbing Agency and not a direct liability to Alex. Again, an implied employer-employee relationship.

    Opportunity for profit
    The opportunity to realize a profit or incur a loss indicates that a worker controls the business aspects of the services rendered and that a business/self-employment relationship likely exists. The extent to which a worker can control his or her remuneration for work performed, and increase or decrease expenses, speaks to that individual's ability to manage profits. Employee revenues are generally defined in advance and there is often little opportunity to share in the profits of the business. This latter situation defined Alex's relationship with Charlie's.

    So what does all of this mean for advisors? Many clients face employment offers similar to Alex's without a complete understanding of related implications. Small business owners also face challenges in this area — in an effort to maximize profit and decrease employment-related expenses, the hiring of contractors as opposed to employees is often considered.

    If you have clients in these predicaments, communicate the differences between employment and self-employment. If the terms and conditions of the work contract do not support the selected employment status, both worker and payer can face costly fees in respect of denied tax deductions, and/or unpaid CPP and EI premiums.

    Although Alex and Charlie's Plumbing Agency agreed that he would be treated as self-employed, characteristics of his work arrangement did not support this status. The inability to define his own work hours and work on multiple contracts at the same time, and his release of financial risk for the work performed, all pointed to an employer-employee relationship. Charlie's provision of tools and equipment required to do the job also suggested that Alex was working as an employee as opposed to being self-employed.

    If a worker or payer is not sure of the worker's employment status, either party can request a ruling from the CRA using form CPT1, Request for a Ruling as to the Status of a Worker Under the Canada Pension Plan and/or the Employment Insurance Act. In working with your clients, note that each case is unique, and the facts of each case must be analyzed to determine the most appropriate result.

    Stay Well and Pay It Forward.

    Tuesday, June 23, 2009

    High Interest Savings ???

    The oxymoron above has become truly funny over the past few months. As the man on TV likes to say, "Save Your Money". Nowadays, trying to actually earn some interest is becoming more and more difficult. As of June 7, 2009, the average savings account pays .83% interest per year. To put that in perspective, if you invested $10,000 for one year, you would earn roughly $7 per month BEFORE TAX. On an after tax basis, the average Canadian would earn $60 for the year on a $10,000 investment.

    Does that mean you should stop saving money - of course not. What it does imply is that people really need to be smart about the ways they save their money right now. Experts agree that people should have an emergency fund of between one and three months income. But where should you put those funds? In the past, we always looked at traditional savings plans (savings accounts, GIC's or Canada/Ontario Savings Bonds). Posted GIC rates are notoriously inaccurate, but based on current numbers
    , you don't want to lock up your money for long periods of time. Even so, most one year GIC's only pay a slightly higher return than a savings account. Government Savings Bonds offer similar returns to GIC's but have the flexibility of being cashable. However, they are usually only available for purchase during specific times during the year.

    The advent of the Tax Free Savings Account in 2009, offers perhaps the best way to have that "rainy-day" account. With similar interest rates to "savings" accounts, but no taxes to pay, they offer flexibility and the benefits of keeping all of the interest. With a married couple, they could each set aside $5,000 which would be a sufficient amount for most people for an emergency.

    Is there something smarter to do? It depends upon your situation. I run into people who have money set aside for an emergency, and they owe $10,000 to $20,000 on their line of credit or credit cards. The interest on these debts is not tax deductible and often runs as high as 28%. Here's some perspective from the above example. A couple owe $10,000 on a credit card with an interest rate of 18%. The interest is effectively $1,800 per year or $150 per month. Why have the "emergency fund" at a cost of $150 per month. Pay down your debt, and then save the $150 per month in a TFSA to create an emergency fund. What do you do if you have an emergency? Use the credit card but ONLY FOR AN EMERGENCY.

    Other suggestions - pay down debts, put the money towards an RRSP (which gives the average Canadian a 31% refund), or pay down your mortgage. The only thing that is High Interest in the savings market nowadays is the fact that people actually pay attention to what they earn. The harsh reality is that with the Bank of Canada planning on maintaining a low interest rate environment to stimulate the economy, expect these rates to remain low well into 2010. We need to be smart about saving our money and paying our bills. Nowadays, it doesn't seem to matter where you save your money - it won't earn that much anyway.

    As always, Stay Well and Pay It Forward.

    Friday, June 19, 2009

    Pat, I'll Take the Letter V.

    Okay, you may be wondering why I suddenly fell in love with Wheel of Fortune. That's simply not the case here. Game shows are a part of American culture as is "lack of reality" shows and soap operas. To each his own. As will be explained in the coming paragraphs, you and I would definitely prefer the letter V to the letters U or L.

    Thoroughly confused - please don't be. The above is a simple analogy that many "finance geeks" use to describe a market turnaround. Last fall, many of the experts called for a letter L - in other words a sharp downturn followed by a long and pronounced bottoming. As we moved into Jan-Feb 2009, these same people began changing their tunes and predicting more of a U - a sharp downturn, a flattening market followed by a rapid increase.

    Over the last three weeks, there has been a sudden uptick in the number of financial analysts who are calling for a V shaped recovery. In this scenario, markets experience a sharp decline, but there is little bottoming out. They essentially "bounce" off the bottom and begin an almost equally rapid ascent. Since March 9th, global stock markets have gone up between 20%-30%. That is not to say we are out of this mess yet. On BNN on June 10th, Gerry Brockelsby, partner, Marquest Asset Management provided one of the best explanations of the different "letters" of market recovery. He expects a "snap back" of the recovery in the short term (next 6-24 months). The longer term presents another set of problems (mentioned in a previous blog or two) as inflation raises its very ugly head.

    The longer term recovery of markets is threatened by the excess liquidity in the system. This eventually creates traction in the economy and as he states, we are already seeing the benefits of the low interest rates and stimulus packages introduced globally. Inflation is not a problem now. You cannot have an inflation issue until you have an economic recovery. Once the recovery takes hold, then the various economic powers need to be begin the complicated process of "withdrawing liquidity" from the system. If you take the funds out too slowly, it leads to rapid inflation. If you remove the funds too quickly, then we face an interest rate problem. Either one of these issues could lead to another significant market decline. Let's hope that the economic "leaders" get it right this time, or we could go back down through a similar market trough.

    As always, Stay Well and Pay It Forward.

    Tuesday, June 16, 2009

    Defined Demise - Is This The End for Old Style Pensions?

    A long time ago, in a galaxy far, far away, someone created the first defined benefit pension plan. They were probably a well paid actuary and wanted to ensure they had a comfortable retirement.

    This may or may not represent the origin of the DB pension plan, but you can almost guarantee that recent developments are foretelling the beginning of the end. If you want to understand the whys you need to know the what's first. As mentioned in a previous blog, the defined benefit pension (gold-plated) is just as it sounds. The payout, when it comes time to collect, is fixed to a certain formula. The formula is typically a combination of years of service multiplied by a percentage of your average salary over the last several years of service. For example, someone working for the federal government for 35 years, will collect roughly 70% of their "average" income during their retirement years. The average usually reflects an average of the best 5 out of the last 8 years worked. Suppose the final average income was $60,000. That means the person would receive $42,000 per year. The amount is often indexed to inflation. So what does this cost. Let's look at an example.

    We have a married woman age 60. Her husband also is age 60. The pension amount she is entitled to is for $3500 per month, indexed at 2% per annum. If she passes away, the survivor benefit of $2100 per month is payable for life to the husband. In any case, a minimum of 10 years payments will be made either to the wife, her husband or a beneficiary. The cost for such a plan? Would you believe slightly over $750,000. That is the amount that the government and the employee would need to set aside over her career to fund her pension.

    The interesting thing as we are finding out of late, is that all of the risk falls within the hands of the "employer". If there is insufficient funds in the plan, all the employer can do is put more money into the pension. They can ask the employee to contribute more, but usually that means dealing with union headaches. In the case of GM Canada, their pension plan is so badly underfunded, it is estimated that for the roughly 43,000 employees past and present, the plan only has enough money to pay 56.5% of the pensions. The scariest part is this - these numbers were based upon estimates from November 2006. Can you imagine the shortfall with the market declines of late 2008. Are they below 50%?

    Former CAW head Buzz Hargrove (right) must wonder what he was thinking last August. Hargrove and GM executives insisted pension fears were unwarranted. A worst-case scenario that would trigger pension reductions is "so remote a possibility it's not worth speculating on," said Hargrove. As we have seen over the past 10 months, the situation is far worse than old "Buzz" ever believed or acknowledged. The actual dollar figure they are short by? GM Canada's defined-benefit plan for hourly workers was underfunded by $1.5-billion as of Nov. 30, 2007, the last filed valuation.

    Published reports suggested the shortfall was as high as $7-billion. For a provincially regulated pension plan like GM Canada's, the government sets aside funds to ensure that pensioners are not left penniless. The problem? There is not enough money in Ontario's pension plan safety net to support GM pensioners if the company goes bankrupt, Premier Dalton McGuinty warned.

    "The money available in that is very, very modest," McGuinty said, noting the Pension Benefits Guarantee Fund totals about $100 million – not nearly enough to cover the billions of dollars involved in the automaker's pensions.

    So let's summarize - the plans are fantastic if you are the person in the plan. For everyone else they are expensive to run, dangerous for the employer due to unpredictable costs and uncontrollable markets. With more and more Canadians working for themselves and for "smaller" companies, most pensions offered today are "Defined Contribution plans". In these plans, the risk is with the employee, the costs are known ahead of time, and the general public will never be expected to bail them out. In looking at many pension plans, a recent study found that the aggregate deficit exceeded a staggering $250 billion.

    The mere fact that defined benefit pension plans still exist is an affront to average Canadians. The federal government in both Canada and the US is "buying" an ownership position in car makers. They are doing it with your tax dollars. Do you want your tax monies spent to ensure that someone gets a fantastic no-risk pension? When will the government wake up and realize the astronomical costs associated with these plans. This is not likely as the government employees would be cutting their own throats. It will take the collective efforts of all Canadians to end the insanity that is the Defined Benefit pension plan. Will it happen? I don't expect it to occur in my lifetime. Too many vocal groups would be against it. Unions would be up in arms. Is there a solution? Sure there is - make the employees/unions and companies equally responsible for any shortfalls and have no government assistance program for companies who don't meet this criteria.

    Stay Well and Pay It Forward.

    Thursday, June 11, 2009

    Random Thoughts For Month of May

    One of the newest features for this blog will be an "update" on what happened during the previous month. Sometimes the news will be positive, and sometimes it will be (see picture at right).

    Looking back at the month of May, you would be shocked to see the number of "records" and highs we set. Some of these include:

    - TSX had the highest one month % return since Dec/99
    - S&P 500 had best 3 month return in 60 years - up 25%
    - the Canadian dollar had biggest single-month rise since 1950
    - highest level in a year and biggest monthly increase on record for the Canadian consumer confidence index.

    World markets made substantial gains in the month and now are at or above the break-even point for the year. Canada's big five banks all reported better than expected earnings during the first quarter. Makes you wonder if we are in a recession or not. All of the pundits who suggested we were in a bear market rally are now beginning to "backtrack" on those statements. I am in the midst of a book on investing risk and came across a great quote that talks about those "experts".

    “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” – Laurence J. Peter

    With the good news comes the "yucky" stuff. The TSX was buoyed by oil prices which have doubled since last fall. Oh the days of 70 cent per litre gas - where have you gone. GM formally announced what everyone already knew - they are $80 Billion in the hole. Canadian GDP for the first quarter was the worst in 18 years. As well, here is a scary number to ponder - 95% of the S&P/TSX gains in May came from a combination of the resource sectors (energy and materials) and the financial sector. Over half of the major US banks tested require more capital. The other half apparently want to repay TARP (Troubled Asset Recovery Program) funds so they can go back to the good old days.

    Investors are feeling more confident and that is affecting the bond markets as well. Improved global economic data has had the effect of getting investors out of safe-haven investments (cash and bonds) and into equities/stocks. Since early March, an estimated $120 billion (US$) has flowed out of cash and likely into equities. This has fueled the rapid stock market increases.

    We have seen the deceleration of the downturn in the economy, and that is often an indicator to a more sustained economic recovery. Will this be the start of the next bull market? That may be presumptuous to assume now, but the patterns are similar to past bear/bull transitions. If you previously moved money out of the markets, you missed out on a significant increase over the past 3 months. If you stayed the course and were patient and maintained a long term view, the past 3 months and the coming months may signal a return to the "glory days" of the past. One last thing to remember - those who forget the past are condemned to repeat it.

    Friday, June 5, 2009

    How to Make 50% Returns In The Market - Update

    Every now and then, it's important to reflect back upon past stories and predictions. In looking back six months, I came across something of great interest.

    Let's flash back to Dec 4, 2008 in the pages of this blog.

    Obviously, yours truly has suffered some form of a stroke or other mental disorder. The above statements tend to bring to mind the infomercials you see on BNN that show everyday investors how to time and beat the market. It always amazes me how many people get duped into buying these - makes you wonder why true professionals (fund managers/economists) ignore them.

    George Vasic, strategist and chief economist at UBS believes that the Toronto Stock Market will hit 12,500 in 2009. That's a 54% increase over current values. Now, who the heck is George Vasic you may ask. George Vasic is the Equity Strategist and Chief Economist for UBS Securities Canada Inc. In this capacity he is responsible for the Canadian market and economic outlook, sector rotation and asset mix recommendations. He has consistently ranked in the top 5 in both the strategy and economics categories, has won several awards for forecast accuracy, is widely quoted in the media, and for five years was a contributing editor to Canadian Business magazine.

    Obviously, Mr. Vasic made this rather bold statement due to his lack of knowledge, or because he wants the entire business community to perceive him as having gone off the deep end. He wouldn't actually say something like that because of a deep-seated belief that things are ripe for a quick turnaround now would he? More and more people "in the know" are pointing to a bottoming for the market, and if you would harken back to past blogs, you would see the date December 4, 2008 as a predicted market bottom from yours truly (courtesy of the work of very smart people). We will see how accurate these forecasts are over the coming weeks.

    Has his opinion changed over the past six months - not really. In mid-May, he reduced his forecast slightly to 12,000 points
    , but that still represents a 50% increase from where we were. How accurate was his prediction? Well over the past six months, the TSX has risen, fallen and risen again - to it's now lofty 10,470. How much is that you may ask? That change represents an increase of 29% so far. Could we actually expect to see another 21% increase over the coming 6 months? Remains to be seen, but so far, he has been right on target.

    Last December, most of the world was in a panic, watching their investment values tumble and hearing nothing but more bad news. When I originally penned this blog entry, I did so for one simple reason. I wanted people to realize that things would turn around and markets would recover. Markets are cyclical in nature. As has happened before, and will happen again, markets declined and then markets rose.

    As more companies complete the painful process of cutting and gutting, a new economy will begin to emerge. New alliances will be formed, big companies will continue to gobble up their smaller counterparts (making some people very rich), and eventually this will all come to an end. In that same December column, I asked whether people would change their investment patterns (RRSP) for the future. Some said no, but several said yes. They were afraid because of what had happened without realizing that this was nothing new. Was a market recovery a great surprise to your truly? Not at all. I not only knew it would happen but simply wondered when and how much. The when seems to have already been answered. The question of how much remains to be seen.

    Stay Well and Pay It Forward.

    Tuesday, June 2, 2009

    Wow the markets really suck...

    Recent conversations with people have left me shaken. People were wondering whether the markets would ever recover. HOW MUCH MORE MONEY HAVE I LOST. While I certainly understand that modern society no longer operates like "Leave it to Beaver", I am disappointed when I see people take so little interest in something so vitally important to themselves and their future. The lack of "real" stories in the mainstream media baffles me. Let's talk about bailouts, deficits, and big muckety mucks getting handouts and big bonuses. Sticking to the basics is not "popular" and doesn't sell. I guess this explains the popularity of "lack of reality TV shows". However, it still shocks me to see that people have no idea where we are on the "financial recovery" roller coaster.

    The above chart demonstrates the various cycles of human emotion in relation to market performance, and to the same degree their personal finances. Last fall, around the end of September to early October, we reached the point of "despondency and depression". This coincides with the best buying opportunity of our generation. Where are we now? In speaking with people, they seem to be stuck in the same rut (literally). Is this reality? I think not.

    As you can see , markets have recovered significantly. The chart on the left represents the performance of the Toronto Stock Market for the three months ending May 29, 2009. Do you notice a pattern emerging? Wow, does it actually look like the markets are going up? I keep waiting for the other shoe to fall, BUT IT FELL ALMOST THREE MONTHS AGO AND NO ONE NOTICED.

    Global stock markets have now enjoyed three consecutive months of strong growth. While jobs are still being lost, and companies continue to trim staff and make other cuts, these are a normal part of the recovery process. One of the best parts of a blog is being able to look back and see whether we were right or wrong.

    Quote from my blog of November 25, 2008

    Once again we have seen the evidence pointing out that history does tend to repeat itself - while the price of gas at the pumps looks nice, the corresponding drop in the Toronto Stock market makes people realize you cannot have your cake and eat it too. So this leads back to the obvious question as to where we are going to be in the future. If you polled most economists, they would probably speculate as to another six-nine months of economic contraction. Markets tend to come out of a protracted drop sooner than the economy - does that mean we are near the end?

    Wow. The price of gas is back up to about a loonie, and markets have recovered significantly. I never would have seen this coming. Oops I guess I lied - not only did we say it was coming, you can still go back and read about it. This is not to imply we are out of the woods yet. The car industry faces major challenges still, interest rates have bottomed out (with no where to go but up and I MEAN UP). With almost every major government in the world running on fumes and deficit financing, you can likely expect interest rates to begin to rise later this year. What will a mortgage cost you in the future? How does a 5 year closed mortgage for 8% sound? My suggestion to everyone is the same - get your financial house in order. Pay your bills and save some for a rainy day. Governments want us to spend our way out of this recession; let someone else do the spending.

    Stay Well and Pay It Forward.