Finances With Garth Turner

Last modified on September 28th, 2013

I’ve been meaning to do a posting about the Garth Turner event the other day, but haven’t gotten around to it. While Garth is a good public speaker, I didn’t really learn anything at the event that I didn’t already know or believe. Yes, Garth believes real estate in Canada is in for a rocky ride, as do I. Yes, we are about to head into a period of asset deflation following by price inflation.

I’ve spent the last six months reading tons of books on investing and retirement, partially because I’m interesting in the subject, and partially because I’ve been a bit bored and felt like learning something new. I’d wager that I know more than the average person at this point about investment strategies and ways to build a nest egg.

But truthfully, even armed with all that knowledge I sometimes feel like we’re in a world without any financial bullets. All the retirement calculations are based on returns of around 10%, often ignoring the affects of inflation. Investing in the stock market when it averaged 10% a year makes sense, but the return in the market for the last ten years has been effectively zero, and doesn’t really show any signs of recovering. That means if you left your money in the markets over the last ten years, you’d have lost money due to the declining value of the dollar.

GICs are basically a waste of time and effort at the current interest rates. Unless you’re willing to lock in for five years or more, chances are you’re not even going to get a rate that matches the published inflation rates. Even if you do get a decent rate, GICs are taxed like interest, which means that are taxed at your marginal rate. For most people in a position to save money, that’s at least 30%, more likely 43%. So that 4% GIC actually only nets you closer to 2% once you factor in the tax. And if your after tax net is less than the inflation rate (2.1%), you basically locked your money up for a period of time in order to lose money.

Garth’s a big proponent of preferred shares. Preferred shares are issued by large companies and given more perks than typical common shares. When a company fails, preferred share holders are further ahead in line than common share holders. Also, if a company suspends dividends, a lot of preferred share holders will get catch up payments as soon as the company starts doing well again.

Some of the best preferred shares in Canada are issued by the banks. For example, Royal Bank recently issued a whack of preferred shares at around a 5.9% yield. Since preferred shares can be bought and sold like stocks, they are far more liquid than GICs. In addition, because the companies pay quarterly dividends, they are subject to the dividend tax rate which is generally smaller than the capital gains rate. So while there’s the potential of the stock price to appreciate as well, preferred shares literally pay you to own them via company dividends. In Garth’s words, take your money out of the bank and simply buy the bank instead (via preferred shares).

Garth said a lot more, but those were some of the highlights for me. My friend Duncan was at the event with me, so you can read his summary as well.

5 responses to “Finances With Garth Turner”

  1. Boris Mann says:

    Thanks for the write up, Duane. I had hoped to make the big Garth show, but ended up having something else the same night (actually, a really fantastic Canadian indie film about rock n roll & vampires called “Suck”).

    Bank preferred shares as the only option? I agree, doesn’t feel like a financial bullet at all. At least you’ll be invested in a company that wants to save its own hide should things go south.

  2. Duane Storey says:

    Well, basically at this point in the game just have a diversified portfolio. You probably won’t make huge gains, but you’ll hopefully be protected against huge losses. Because preferred shares give tax reduced gains, they really only make sense outside of a tax shelter (i.e. outside of your RRSP). If you’re investing in your RRSP, bonds typically make more sense, since your RRSP shelters them from tax. Unfortunately bond prices are negatively correlated with interest rates, meaning that bond prices are at the peak now and are only going to start dropping as rates rise. But given that most bank risk is completely mitigated by government programs (FDIC, CMHC), banks are nearly risk free investments in my mind, at least compared to most companies.

    I’m less optimistic about the stock market than Garth, so I personally don’t expect big gains there. After the last big jump in the US markets, I dropped my holdings from 30% down to 10%. Precious metals are a good bet right now since the US is completely debasing it’s currency, but gold has been on a crazy upswing, and I’m not sure it makes sense to buy right now.

    So yah, confusing times we live in.

  3. Duncan says:

    Thx for the mention Duane!

    I agree that we’re in for many years of slow, boring growth in the stock markets. Canadian dividend paying stocks are a great option as they pay you to hold them and as you said are less heavily taxed. Better to milk the cow each quarter and have cash flow into your pocket steadily over time.

    I think gold is going much higher as currencies continue to lose strength. There may be a few small pull backs, but the trend is up. I see gold over $1,500 US by year end if the current pattern continues. Buy on the dips if at all and I think you’ll do even better.

    The safe bet right now though is to simply hold cash. Canadian dollars are tied to oil and commodities which I believe are going much higher. This will actually strengthen our currency despite it being fiat and eroded by inflation. In a way, our dollar is backed by black gold! Relative to other currencies, our dollar will purchase more. It’s a great time to travel being Canadian as your costs go down every month!

  4. Duane Storey says:

    That’s great, because inflation in Argentina is around 10% right now!

  5. You, my friend, will live like a Tzar over there! You could have a body guard, handler, and personal masseuse on hand at all times. 🙂

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