Portfolio Confidential

Here are three real world confidential portfolio discussions.

Q: I have been managing my mother’s retirement portfolio and have a certain percentage of assets allocated to U.S.-listed Exchange-Traded Funds (ETF) for Management Expense Ratio (MER) reasons as well as exposure to asset classes not available in Canada. The two ETFs she owns are iShares gold trust ETF (IAU) and Vanguard Small Cap Value ETF (VBR). They are held in a non-registered account. The value is around $188,000 combined.

A: What I did not consider in this allocation is exposure to U.S. estate taxes. My mother is 82 and in good health but I am wondering if I should be proactively looking at selling these U.S.-listed assets? Of course, this would trigger capital gains but it is unclear to me what our U.S. estate tax exposure is, if my mother were to pass away.

If your mother does not have assets over U.S. $11 million (if she dies between now and 2025) or over U.S. $5 million after that date (unless legislation changes) then she is not subject to U.S. estate tax.

From this recent document: “If the value of your worldwide estate is not greater than U.S. $11.18 million, you will not be subject to U.S. estate tax. However, if the value of your U.S. situs (the place where an asset is considered to be located for legal purposes) assets is greater than U.S. $60,000, you must file a U.S. estate tax return even though you will not have an estate tax liability.”

As long as this $188,000 is invested in a Canadian mutual fund or a Canadian corporation that holds U.S. stocks, these assets won’t be considered U.S. assets. However, it appears from what you have written that these U.S. ETFs are in a non-registered personal account. So, please note that U.S. ETFs trading on a U.S. exchange would be considered U.S.-situated assets, but Canadian ETFs holding U.S. stocks would not be considered U.S.-situated assets.

I think the bottom line is that unless your Mom’s account is over U.S. $11 million and/or you don’t want to bother having to file a U.S. estate tax return, you don’t need to take any action.

Q: I have organized my savings into three buckets: laddered fixed income certificates (1 -5 years) for home renovations and new appliances, global stocks (via ETFs) for long-term growth/retirement, and cash or cash equivalents for luxury spending. COVID-19 has made me clearly realize how much I enjoy pampering myself with spa treatments and fine dining so I have decided to make these pleasures part of my financial plan. My budget is $15,000 per year for this bucket…I wonder if there is a way I could be investing this money rather than just having it sit in cash?

A: First, I’d like to congratulate you on your decision to pamper yourself—we could all use a bit of that these days! As you have a fixed budget in mind for this bucket and you will be drawing down on the $15,000 throughout the year to support your fun activities…I can’t think of any safe way to invest these funds other than in a highly liquid cash equivalent such as a money market fund. Having said this, I’ll share my personal strategy for my “spoiling myself” annual spending allocation.

Important note: This strategy is not for the faint of heart. There is absolutely a risk of losing money and not being able to pamper yourself at all. If you don’t want that risk, stick to cash.

For the last two years, I have set aside some of my non-registered retirement savings ($50,000) and traded it in sector-specific bets, while the majority of my savings are invested in relatively safer market ETFs. Trading profits (if any) then funded nonessential-but-fun things like massages, personal weight training sessions, jars of stupidly expensive Jo Malone body lotion, or even a long weekend in New Orleans.

This year, I put my strategy in place at the end of April during the lockdown. I had a strong suspicion that the technology sector would fare well during and after COVID-19 so I invested $50,000 in Invesco QQQ (NASDAQ) Index ETF (QQC.F.) My idea was to keep my original investment amount intact as part of my long-term growth portfolio but I take profits whenever my $50,000 increases in value by 5%. Every time I make this $2,500 profit, I move it into a separate savings account earmarked for luxury spending. Over the past three months QQQ has appreciated by 23%. I still have my $50,000 nest egg, and also, have a lovely stash of cash for fun stuff: $10,000 will buy a lot of body lotion!

This strategy obviously only works when your stock or fund pick is going up. The fun part (for me) is the idea of betting on different sectors over the year. Sometimes I get it wrong but when that happens, I just cut back on indulgent spending because I haven’t earned it. The bigger risk, of course, would be losing my original $50,000 but

a) I won’t need that money for at least 20 years and

b) Worst case I think I could live without it. Famous last words!

Q: I am a 45-year-old professional woman and throughout my career I have always had a male investment advisor. Lately I’ve been wondering if it would be better for me to deal with a female advisor. What do you think?

A: I’ve been working in the investment industry for a very long time now and over the years I’ve met many great advisors, female and male. Being a good advisor doesn’t depend on gender. What does matter is having the right qualifications and communicating in the right language.

My research has shown that most women aren’t interested in being shown hundreds of charts and graphs…they prefer to hear the stories behind the companies they invest in. What does the company do? Where does the management team come from? What are they raising money for? Female clients are also interested in understanding the bigger picture context for their investment decisions: how does this relate to my family, life goals, my longer-term plan and even society as a whole? Women want to feel good about where they are putting their money. The most successful advisors have a deep understanding of their client’s personality and their preference in style of learning and communication.

All else being equal, you don’t necessarily need a female advisor—you need a good advisor! Someone with top notch qualifications who can communicate in a way that makes sense to you. Does this describe your current advisor? If not, cut ties and move on. Your financial future is at stake here.

Barbara Stewart, CFA. Do you have questions about your own investment portfolio? I have recently set up The Rich Thinking® Financial Advice Hotline. This will be a win/win: you get a free 30-minute confidential Zoom chat offering an independent, unbiased perspective on your financial situation with no sales pitch! In exchange, I get to use the anonymized data that will come from these conversations to make my Rich Thinking research even better. Email me to book your Zoom discussion: barbara@barbarastewart.ca