2023 Fall Newsletter
Fortin Wealth Advisory Group - Oct 20, 2023
I hope that you are enjoying the submissions from Ryan in Ryan’s corner. His articles are always ignited from a place of passion of what we have been hearing or experiencing with clients. Also, Jordan’s corner is focused on Financial Literacy for the Next Generation! It still comes up as a key interest from our clients to start to teach their children and grandchildren. So, please forward on! And this newsletter we are trying something new with “Joanna’s corner” which is an update on all thing's admin and processes. Let us know what you think.
Income v. Capital Appreciation
~a reminder from Christine
There are 3 downfalls with behavioural investing:
- Human nature intuitively believes the essential issue is safeguarding principal; in fact, it is the challenge of maintaining an income that rises to offset increasing living costs that is the biggest risk to most of us except the ultra wealthy.
- Income that rises at a premium to inflation over decades-long retirement is historically available, among financial assets, only from equities (that is being an owner of great companies)
- In its obsession with principal, human nature will regard even the most quotidian downturns in equity values as existential crises, and will seek to flee them, dooming a dignified, independent retirement.
That is all.
FIVE WAYS OUR BRAINS make us bad investors
By: Christine Fortin
I am obsessed lately with all things neuroscience. I have been reading up on what prompts us to go to the Survival Brain Loop during conversations v. getting us to the Logical Brain Loop during conversations. Much of this interest comes from how some of you may know that my son shows up as having ADHD. People with ADHD (approx. 2-3% of the population) have the tendency to operate in the Survival Brain Loop which is fight, flight, freeze and appease. Which means they appear as having brain fog as cortisol and adrenaline is pumping out and sending blood to the amygdala (reptilian brain) and thus activates the oldest part of our brains. Their brain waves also operate in the 25 – 35 MHz. For my son’s football participation this shows up as hyper focus, intense, never vacillating and never rattled. It also shows up as challenges like, multiple step instructions get missed. Side note: Did you know that it is suspected that 20% of professional athletes have ADHD and up to 30% of professional football players have ADHD? It is no wonder. Put in extraordinarily stressful situations they thrive.
What puts us in our survival loop? Telling someone, yelling at someone, or trying to sell someone on a concept. Basically, it never goes well.
How do we get to Logical Thinking Brain Loop? This is the newest part of our brain that has developed over time. It comes from appreciation, confidence, ownership, validation. This in turn sends oxytocin and dopamine flowing and sends more blood to the Logical Brain. Aha! Which in turn gives us the ability to learn and strategize. So, back to my football analogy, if you coach my son, how will you get him to do what you want him to? Tell him? NO WAY. He is already in fight or flight likely. So, to get him to the logical brain you need to give him confidence and appreciation and ownership as to what task you want him to do. For those who care, when you are in your logical brain, your MHz typically drop. Ideally when you are very calm and calculated you would be in the 12-16 MHz.
Why am I reviewing this? Well, because much of our brain is NOT BUILT to make us good investors. There has been a study around for at least 30 years that shows what a mutual fund earned annually v. what the avg investor in that mutual fund earned. Shouldn’t they be the same? Well, they aren’t. Because the investor made poor behavioural decisions on buying at the wrong time and selling at the wrong time.
Here are five (there are many more!) common behavioural biases that can lead to bad investment decisions. And by the way, this can be applied to any decision like purchasing real estate and making a business acquisition.
You may know that stomach-churning feeling that comes with losing money on a stock? That pain sometimes seems to hurt more than the joy of seeing your portfolio rise. There is a term for this feeling: loss aversion, and it can cause you to make irrational decisions, such as panic-selling investments that can throw off your financial plans.
Consider what happened in March 2020, when investors sold their stocks en masse, fearing the economic fallout from the initial pandemic lockdowns. The markets bounced back within weeks and, within months, reached new highs, rewarding those who stayed calm and held on.
Loss aversion can also drive you to sell your winning stocks for quick returns even when there are signs the market can climb higher, and hold on to your losers, hoping they’ll move higher again. It can also prevent you from taking any risks, which can stunt your portfolio performance over the long term.
There’s nothing like news of a hot stock or sector to rally investors into buying more. It’s called herd mentality and it happens if you decide to follow the crowd or market buzz around an investment without asking questions or doing your own research.
Examples include the “meme stock” frenzy during the early days of the pandemic and the cryptocurrency craze in more recent years. While joining the herd can lead to huge gains in the short term, many investors ultimately lose out when they jump on bandwagon investment decisions.
That’s why it’s important to do your own research and consult with your financial professional before selecting which stocks to buy and determine how much, if any, of those investments are suitable for your portfolio. The right answer will always depend on your risk tolerance and short- and longer-term investment goals.
Have you ever felt unsure about a purchase or personal matter and sought validation from someone you know who shares your perspective? We all do. It’s called confirmation bias. It’s when we actively seek out, interpret, and retain information that aligns with our beliefs. It makes us feel better.
Seeking approval from like-minded people can help you make decisions, but it can also create blind spots. When you only focus on what you know or believe, you risk missing contradictory information that could negatively (or positively) impact your portfolio.
Confirmation bias has also been known to cause some investors to become obsessed with a few companies or investment types. When this happens, your portfolio could become less diversified, which could mean you’re exposing yourself to too much risk – or too little – depending on your investment needs and goals.
When you’re starting a company or growing your wealth, you need to have a lot of confidence in your decisions – but overconfidence can be costly. If you’ve ever driven to a new destination without consulting a map, only to end up lost, chances are you’ve experienced overconfidence bias. Some investors can have the same self-assurance when wading into a stock or a sector, leading them to take unnecessary or even excessive risks.
While successful investing may require some hubris, it’s usually the result of doing your due diligence, and consulting with your financial professional to examine a stock’s fundamentals, the sector’s health and any broader macro-economic trends that may impact its performance.
Many of us prefer the path of least resistance, so when we hear or read something that sounds convincing, we’ll rely on that single bit of information to make a decision. It’s like agreeing to go to a movie because you like a certain actor, without knowing anything about the plot.
The same thing happens when you’re investing, although the consequences can be much bigger than potentially watching a bad flick. For investors, this trait is known as “anchoring bias.” For instance, you might invest in a stock based on your first impression of their product, without taking the time to see how well the company’s managed.
For us as Wealth Counselors to the quietly wealthy we know that rigorous long-term planning, goal-focused investment policy and insusceptibility to extreme emotional reactions can’t be practised, much less mastered, by the individual investor acting alone. Declining investment values inflect twice as much psychic pain as increasing values generate positive emotions. Second, human nature cannot distinguish between temporary declines and permanent losses. That is, it can’t tell the difference between genuine risk and mere volatility. Moreover, human nature is, with respect to investments, pro cyclical. In every other area of economic life, humans become increasingly eager to buy things the more their prices are marked down; they shy away from buying items whose prices are unusually high and rising. Concerning investments in general, and equities in particular, these impulses suddenly reverse. Human nature thinks that when an investment’s prices is rising strongly, its risk in declining and profit potential increasing. Whereas when prices are tumbling, people think the return potential is declining and the risk rising.
These very human instincts must produce disastrous investment outcomes – unless us as Behavioural Investment counsellors intervene. By the way, did you know the actual cost of that has been identified as up to 3% annually! Imagine. If you are paying less than 3% for wealth advisory services, that in itself produces a gain.
Family Wealth Discussions with your Adult Children
THE GREAT WEALTH TRANSFER HAS ARRIVED!
With the youngest boomers now turning 60 and the oldest nearing 80, many are now transferring their wealth to the next generation, whether while living or due to their passing. Reportedly, US $84 trillion globally will be passed down to future generations over the next two decades, including investments, real estate, businesses, and other assets.
Almost every client meeting has two discussion points that arise:
- When can our kids meet your team so that they can have a plan in place for themselves?
- How do we go about communicating our Wealth Plan with our adult children and what that means for them?
Let me address the first question. We are a multigenerational advisory team working with families across generations. We are purposely built so that different members of the team will liaise and work with different family members according to fit. AND, we want to start helping the next generation of the family as soon as there is a life event that they have: looking to buy their first home, moving in with a partner, first job, first time having to enroll in a Group RSP. These are all key life events and require a solid plan in place in order to execute. Their plan may look different than their parent’s plan in the complexity, however, it is so critically important that they move in the right direction as early as possible.
The second question is the subject of the remainder of this article.
Talking about wealth is an uncomfortable topic for many families. According to a recent BMO report 1 ,59% of Canadians said they hadn’t had any conversations about budgeting, financial planning or other money-related topics while growing up. At the same time, 61% of family businesses do not have a written, formal succession plan in place, with 29% listing discomfort discussing sensitive topics as a barrier to creating one 2.
Passing a business or significant assets down shouldn’t be left to chance.
There are six different ways you can have money-related discussions with your adult children:
Create a script before the first family meeting
All parents, particularly those of affluent families, tend to avoid conversations with their adult kids because they fear confrontation, a loss of privacy or worry about their offspring becoming entitled and losing their motivation, says Forsythe.
Many also don’t know where to begin. One way to start the process is to take some time to plan and develop a script, which can be an actual document they can reference during the first discussion. When developing that script, think about the key messages you want to share with your family, says Forsythe. Be clear about what you see as the purpose of the wealth, your WHY and intentions to ensure an open dialogue. If you would like an objective opinion on your script, elicit the advice of a trusted advisor.
Set the stage for conduct at meetings
Each family will conduct these conversations differently, but it’s a good idea to develop a code of conduct everyone follows, which Forsythe describes as a “set of guidelines of how you interact and communicate with each other” that all family members can agree on. The code could include the ways in which people speak to each other – in a respectful, non-confrontational tone, for instance – the importance of confidentiality, expectations around participation and more.
“You want to ensure everyone’s showing up putting their best foot forward and being self-aware,” she explains.
Setting goals for the first meeting and subsequent discussions is also important to build communication, trust, and connectivity in the family. Develop an agenda that outlines the purpose and goals of the meeting, along with detailing what topics are for discussion, for information, for decisions or for learning. Consider creating a schedule of future meetings, too – while frequency will vary based on family relationships, geography, and the complexity of the assets, quarterly or bi-annual meetings are common. An annual family retreat can also be another worthwhile approach.
“Meetings may be more structured and formalized based on the generation, size and complexity of the family, but for anyone starting out, it’s good to meet regularly and practice meeting together,” she says.
Get the conversation started
When it comes time to talk, you don’t need to jump into the numbers right away, says Forsythe. Ease into the discussion by starting with easier topics.
“Sometimes it’s getting the parents to talk about their relationship with wealth and their values to help them think about the lessons they’ve learned and what mistakes they made,” she says. “Get them to start talking about what they hope this legacy could look like and if they have multigenerational intentions. This can really set the stage for where they can go next.”
This is an especially useful strategy in families that have already seen assets pass down from one generation to the next. Families can talk about the history of how the wealth was created in the first place and the legacy those assets have already created.
“Values come through in that storytelling, and it’s those core values that are really helpful to ensure that everyone is on the same page,” she explains.
Watch your language
As anyone who has ever been in any sort of argument knows, words matter. One wrong phrase can derail a conversation and, depending on what’s said, even harm relationships. Stay positive and keep the greater good of the family in mind, says Forsythe. She suggests keeping the language in the initial scripts neutral, avoiding any accusatory words that could set someone off.
“Language is very important as everyone has a different definition of certain words,” she explains. “Different kids might pick up on different words and think they mean different things.” Here’s where an advisor can add a lot of value. They’re an objective and neutral party who can tell parents what words to avoid in a script or help tone it down.
Forsythe recalls a situation where she was working with a family and all family members (G1 and G2), were involved in the family business, but they weren’t getting along. When creating their script, the parents wanted to talk about the importance of family relationships; however, they had a line that suggested the kids’ spouses were from different roots and thinking. “I had them pull that right out,” she recalls. “This wasn’t the forum to indicate differences with spouses.”
From Forsythe’s experience, conversations around donating to charitable organizations making a difference or impact in their community or the world are a great way to ease into family finance discussions. Philanthropy is usually something everyone can get behind, which can open the door to broader money discussions. “Philanthropy is a really useful tool; you’ll get used to meeting together and having conversations, learning together, working out disagreements and making decisions together,” she says.
Ideally, you’ll talk about the importance of giving when the kids are young so that when they’re older, you can be open about your legacy intentions and how philanthropy might be incorporated into your master plan.
As part of the giving process, families often review the investment portfolios or assets earmarked for this purpose together, too. “The children are getting a lot of financial skills by going through that process, and these life lessons they’re learning from a charitable giving perspective can absolutely segue over to the wealth transfer.”
Another key part of the wealth transfer discussion is financial education. It’s one thing to say you’re going to receive an inheritance, it’s another to be prepared and educated on the responsibilities of that wealth. While parents can set up trusts and have trustees oversee the stewardship of funds, you’ll still want to make sure your children understand the basics of the stock market, what it means to own real estate, the implication of taxes and so on.
“Having your kids learn about financial education is one of the greatest gifts that you can actually give them,” says Forsythe.
Utilizing an advisor to help educate family members on the nuts and bolts of finances is often a good way to go. If it’s an advisor who is already part of the process, then even better. They’ll not only be able to impart general financial knowledge, but also have insights specific to the family’s situation. Advisors can also direct family members to other experts who can help with more pointed education.
Clearly, there are a lot of moving parts to these conversations, but the keys to a successful wealth transfer discussion are to be purposeful, planned, prepared and patient.
“It definitely takes time,” Forsythe says. “There’s no one-size-fits-all for every family. Being able to have some of those sage conversations can go a long way to helping everyone come to a common understanding – the ‘why’ behind the wealth.”
Let's talk Dividend Growth
With the great reminder from Christine on Income v. Capital Appreciation I thought now would be a great time to discuss dividend growth stocks and why we love them. As news headlines take center stage most have a tendency to watch their portfolios more frequently. The unique characteristic of the stock market is that we have access to changes in capital valuation daily, something that doesn’t exist in other investment types such as real estate and private equity.
This ability to access stock prices on a daily basis forces us to make assumptions on a company based on a bad day or a bad couple weeks rather then allowing for a company to report quarterly earnings to tell us the true picture of its business operations. This is important as key metrics for evaluating strong businesses can be derived from a company’s future earnings, dividends, and cash flows.
Since 1973 the U.S. stock market has halved in value 3 times all of which originating from a “crisis” which over the course of time had been resolved leading to a growth in the S&P 500. From a high of 120 points in 1973 to a value of 4327 points today (36 times) the S&P 500 has risen due to the strong earnings of these companies over time. During this time, we also saw cash dividends up 3 times more then inflation did1 resulting in increased cash flow through these volatile years. By focusing on great income producing companies, we can continue to fund our lifestyle or add to existing holdings over time allowing great companies to continue to grow and provide the capital appreciate in the long run similar to rental properties and small businesses.
Case Study 2,3
One of the best ways to explain this strategy is to review a stock that has provided consistent income through volatile markets while also continuing to provide capital appreciation in the long run.
UnitedHealth Group Inc
From Oct 19th, 2018 to March 20th, 2020 the company had a stock price return of -22.13% yet during that period UnitedHealth Group had grown their dividend per share from $0.90 cents to $1.25, a 39% gain in income. During this time the market endured two corrections of 20%+ while UnitedHealth Group was continuing to grow and flourish resulting in increased income for its shareholders. By being able to identify this strength through its future earnings, dividends and cash flows UnitedHealth Group shareholders were rewarded in the long run through a combination of income and capital appreciation as identified below.
From the trough of the Covid-19 market correction UnitedHealth Group went on to return 1.85x more then the S&P 500 while also growing is dividend cash flow to shareholders by 74% ($1.08 per share to $1.88 per share). By focusing on income and strong cash flow in the short term we can look to stay on track with our Wealth Plan while also allowing us time to take part in the long-term capital appreciation of great companies.
2 - Google Finance
3 – Nasdaq Historical dividend
FINANCIAL LITERACY FOR NEXT GEN
What is a TFSA?
In our summer newsletter I had the chance to explain “the Power of Compounding” which is a powerful tool for investors, but, now that you have that knowledge how do you get started in investing? In this article I have decided to explain one of the most important accounts a Canadian Investor can open, the TFSA.
So what is a TFSA?
A Tax-Free Savings Account is an investment account that was introduced in 2009 by the Canadian Government. Think of it as a bank account that you can use to invest in things like stocks and bonds, but with special rules.
So what exactly is the advantage of a TFSA?
The TFSA is an account that allows you to invest in things like stock, bonds, mutual funds, ETFs. The cool thing about a TFSA is everything inside of it grows tax free, any interest on bonds, any capital gains on stocks. It is all tax free, even when you withdraw it!
A few special rules mentioned earlier that the Canadian Government has put in place regarding TFSA’s are as follows:
- The first is that you must be 18 or 19 to open the account. Now this age depends on the province that you live in, for people in Alberta the age is 18, however, if you live in BC the age is 19.
- Another rule is that you can only contribute a certain amount in per year. This amount is called your “contribution room”. Every year on or after someone turns 18, they will gain contribution room. It does not matter if you have the account open either you will gain the room regardless! For 2023, the contribution room was $6,500 and if you started accumulating room in 2009 when the account was first introduced you would have $88,000 in room!
- If you do decide to move out of country, you will no longer be allowed to contribute to your TFSA and your contribution room will not increase. However, whatever you have inside the account is still allowed to be invested.
One thing to remember about the TFSA is that just because you have money in your TFSA, it does not mean that it’s invested. You still need to pick which investments you would like to invest in.
End of the year is coming up fast! There is some work that will happen before we are able to enjoy the winter holidays. Here are some things that are approaching over the next couple months:
October – I will be reaching out to the remainder of clients with Fall review meetings
November – RESP contributions will be moved over as well as ensuring that the corresponding grant is received
Also, as a reminder, please log in to Gateway every 5 months otherwise the system will automatically change all paperwork to paper based.
We are often asked if our newsletter can be forwarded to friends/family/colleagues. Yes! Also note that this newsletter and the library of previous ones are linked on our website at:
Hear Ye! Hear Ye!
The results of the latest Client Loyalty Survey are just being compiled – keep a look in your inbox for our latest results and findings from the comments on what actions we will do to improve our services and wealth advise.
Fall is Football season in the Fortin Household!
Kase continues to be a high ability player: fast, not afraid of contact, good hands. But this year his passion is following in Ray Lewis’s and Maxx Crosby’s footsteps in playing Linebacker and Defensive End.
House Warming for the Lidder Family
Back from their family vacation in Europe to attend a family wedding Ryan and Amm are busy unpacking as they settle into their new home. Baby Aanya continues to keep them busy and didn’t hold back her dance moves at the reception party in England.
Five Down Two-to-Go
Jordan has been hard at work this year completing exams for his licensing. With five done this year he hopes to complete the final two by the end of the year. He is looking forward to some well-deserved rest at the end of the year.
A Summer of Firsts
Summer was a busy one for Joanna's household. She and her family had the best summer – Elizabeth loved all the firsts! At the Cloverdale rodeo she got to go on some rides, kept asking to go again. Absolutely loved camping and being outside! Swam every opportunity she got, almost turning into a real little mermaid! She is pro at riding her bicycle, even managed to ride without “fairy” wheels but is more confident and goes much faster with them on so mom must run to keep up. Elizabeth found Mickey and Minnie Mouse at a neighbour’s garage sale and had to have them! She went on 3 ferries and slept on our friend’s boat and went fishing but did not like the look of the rock cod they caught. It has only been like 4 months, but boy did Elizabeth grow tall. With Winter coming Joanna is scrambling to find pants long enough as they seemed to have turned into capris overnight as well as appropriate gear to keep going outdoors.