Some stock investors are eternal optimists. Jon Chevreau recently blogged about an UBS Wealth Management report that noted that every ‘lost decade’ was historically followed by a rebounding market — the 1910s were followed by the roaring 20s, the 1930s by a modest rebound in the 1940s and the 1970s by the spectacular bull markets of the 80s and 90s.

Unfortunately, the picture may not be quite as rosy as UBS makes it out to be. In his latest market commentary, Jeremy Grantham points out why stocks can only be expected to deliver modest returns over the near future:

Going into this next decade, we start with the U.S. overpriced, so do not be conned into believing that every bad decade is followed by a good one. It happened historically because when bull markets peak at only 21 times, a bad decade’s return will always make them cheap. This does not necessarily apply to a decade that started at 35 times! A decade’s poor performance can still leave you expensive (as this one has) when it starts so overpriced. We did, however, come close to having good numbers for the next decade: just 9½ months ago we had felt enough pain to make the next decade’s prospects look very good indeed, almost everywhere more than 10% (annualized) plus infl ation on our 7-year forecast. (A decade forecast would be only a little less impressive.) All of this was ruined by a rapid 65% rally, which took more than 7% a year off our 7-year forecast!

Mr. Grantham expects US large cap stocks to return just 1.3% in real-terms over the next seven years.

Bookmark:  

1. Earl Jones, a Montreal financial advisor, ran a Ponzi scheme that cost investors $50 million over a 20 year period. How did he operate the pyramid scheme and how did he get away with it for so long? Tonight’s show on CBC’s Fifth Estate Earl Jones: In Trust was based on exclusive access to the papers filed in the Jones bankruptcy proceedings. The show airs at 9 p.m. and the full documentary will be available online shortly thereafter.
2. Rob Carrick and Jon Chevreau weighed in with their take on new ETFs from BMO and iShares. Rob Carrick is not pleased with ETF vendors carpet bombing the marketplace with new products. Jon Chevreau points out that single country ETFs don’t seem to be such a good idea.
3. Ellen Roseman is hopping mad. And with good reason. You can’t believe what energy marketers are now up to.
4. Michael James on Money pans the audio book version of Money and the Law of Attraction, which featured new-age tosh such as “you can achieve anything by vibrating your source”.
5. Million Dollar Journey featured a guest post on how to save 70% on your grocery bill. Can you really get $5 off coupons?
6. Four Pillars grappled with the problem of lifestyle inflation.
7. Design Diva Daniela Garritano has some easy tips for getting rid of the stuff piling up in our homes in exchange for some of the green stuff.
8. Gail Vaz-Oxlade has some excellent tips for spending money in a meaningful way.
9. The Financial Blogger is batting around ideas that will help him sell his house faster and for a higher price.
10. Canadian Financial Stuff dreams up a fancy new gadget designed to shock people into curbing their overspending. Is he planning on making a pitch in the Dragon’s Den?
11. Balance Junkie has 10 reasons to be cautious with your finances right now.
12. Last but not least, congratulations to Canadian Personal Finance Blog on the first blog anniversary. In a recent post, Tom, the blog author, showed how to control your spending with a budget.

I’m unable to highlight all the articles worth checking out in my weekly round up but you can check them out through my Twitter feed. Hope everyone had a great Super Bowl weekend!

Bookmark:  

The QuickTax 2009 giveaway is now closed. The winner, Jim Squires, has been contacted but I haven’t heard back from him. Jim, if you are reading this, check your email for the winner notification and get back to me. If not, I’ll be picking a new winner.

In addition to entering in the giveaway, readers asked a number of questions in the comments section of the post. I’ll try and answer some of them in this post.

DownshiftDad (and many others) asked:

Any word on a Mac version? They disappointed me a few years ago by discontinuing it.

Here’s what Geoff Morgan of Intuit Canada said about the Mac version: “For Mac users, we offer QuickTax Online. The look and feel of QuickTax Standard, Platinum and Business Unincorporated are almost identical to the desktop version, with a couple differences. Some tools in the Online versions feature enhanced graphical tools. Probably most relevant to you, the Online versions of QuickTax are interview-only, there are no forms.

QuickTax Online is the extent of our Mac offerings as of today. Intuit Canada pulled our Quicken and QuickBooks for Mac desktop products from the market a few years ago. Demand for the Mac version was low, so we focused our development resources where the vast majority of our customers were, which was PC.

While Mac’s share remains approximately 10-12% of the overall market, it’s an increasingly important consumer and small business segment for us, and we’re working to address it. (Note: We’re a publicly traded company, so I can’t make forward-looking statements.)”

Barry asks:

I also would like to know if you will be reviewing the real free options such as StudioTax and Udotaxes.

I do plan to write about competing software products in the future and time permitting, compare the tax returns generated by tax software from different vendors and report back on what I find. I plan to test drive StudioTax and if there are enough new features to warrant a post, I’ll definitely highlight them. However, I should point out that I requested a meeting with the folks behind StudioTax and did not hear back. My job becomes much easier when someone can just tell me what’s new with their software and I don’t have to go digging through tax software. Udotaxes is a new name to me, so thank you Barry (and thanks for recommending StudioTax earlier) for bringing it to my attention.

Ken asks:

Do these tax programs just interview you? Do you still get the capability to go to each form and enter your own data after the interview process?

The desktop versions of QuickTax allow you to input tax information either through the interview method or directly into the forms. It also allows you to switch back and forth between the two. Other software products use either the interview method or the forms method.

Aolis says:

You didn’t explain what the differences are between the versions. I have filed my own taxes for over a decade but recently got married. Is it worth getting the Standard? What about for investments with capital gains?

The main difference between Basic, Standard and Platinum versions lies in the range of questions asked during the interview process. If you are comfortable directly inputting data with the forms method the Basic version should be sufficient for you.

Stay tuned as I have more tax software reviews and giveaways coming up.

Bookmark:  

Many eons ago, I wrote a post wondering why the Government bothers to sell Canada Savings Bonds when so many competing options are available. The post elicited this interesting comment:

Canada Savings Bonds are definitely attractive. In the last 6 months we have discovered that banks and brokerages can easily collapse. Government bonds held for you at a brokerage still depend on the broker in several ways: you trust that there is no fraud and the broker actually holds a bond for YOU; you trust that the bond is not being loaned out in securities lending; you trust that if the bank/broker collapses, CIPF will speedily process an insurance claim and get your bond back to you. With Canada Savings Bonds you aren’t exposed to any of this middleman risk. In most cases with CSB, you are the certified owner of the bond and you directly hold the bond. This is worth something. I am an expert in bond markets and I still hold CSB (mostly because I don’t trust the banks, brokerages, or CIPF).

Subsequently, another reader suggested checking out the Bankruptcy and Insolvency Act (BIA) and the Marlow case. A quick search brought up this excellent article titled When Securities Firms Fail: An Inside Look at the Marlow Group Bankruptcy. The article points out that when a broker goes bankrupt, only securities registered in customers’ names will be returned to customers and all other securities will be put in a common pool to be distributed pro rata to customers. Since it is common for brokerage assets to be held in street name, it is worth asking: how do we protect our investments if our broker goes bankrupt?

Bookmark:  

You may want to check out a recent C. D. Howe Institute report titled Saver’s Choice: Comparing the Marginal Effective Tax Burdens on RRSPs. The report concluded that TFSAs are a more tax-efficient retirement savings vehicle than RRSPs for many Canadians because the effective rate of tax payable on retirement income is often higher than that the tax imposed on regular income during working life. To make a comprehensive comparison of effective tax rates, the authors of the report use a metric they call marginal effective tax rate (METR):

The marginal effective tax rate (METR) is the tax rate bearing on an incremental dollar of income, or the next dollar earned. For individuals, comprehensive METR measures take into account the income thresholds and statutory rates of the personal income tax system, as well as the impacts of tax deductions and credits and income-tested federal and provincial benefits.

The authors then compute the difference in METRs between working-life income versus retirement income and produce graphs such as the one shown below (the graph shows the METR delta for a Single, Ontario resident replacing 60% of working life income) for three provinces (Alberta, Ontario and Quebec) and three income replacement rates (80%, 70% and 60%).

The graph confirms our suspicions that lower income Canadians are better off to save for retirement in a TFSA. Recall that withdrawals from a RRSP result in a claw back of the Guaranteed Income Supplement (GIS) boosting the effective tax rate to as much as 70%. On the other hand, withdrawals from the TFSA are not counted in calculations for income-tested benefits handing the TFSA a massive advantage for low-income Canadians.

However, there is a surprise in the findings. The report’s METR comparisons seems to suggest that Canadians in middle tax brackets (such as those Ontario residents earning between $54,000 and $81,000 and aiming for a 60% replacement rate) might be better off saving for retirement in a TFSA.

Unfortunately, I think the analysis, which seems complicated enough, is still too simplistic. What matters in comparing the TFSA and RRSP is not the METR, it is the AETR (average effective tax rate) on contributions to a retirement account and the AETR at the time of withdrawal. Let’s take a simple example. A one-income household with an annual income of $100,000 will likely have a AETR of 43% in their working years. For a 80% replacement rate, the AETR on withdrawals is likely to be 30% or less because (a) due to income from the CPP, most of the GIS is clawed back anyway, whether or not the household receives another dollar of income from a RRIF and (b) income-splitting opportunities that allow the household avoid the OAS claw back. Add children to the mixture and the analysis becomes even more complicated because RRSP contributions will not only result in tax deductions but also increase CCTB payments.

Ultimately, the TFSA versus RRSP question is largely academic because who knows how tax rules, brackets and rates will evolve and change in the future. For now, it seems clear that low-income households can skip the RRSP and save in a TFSA. Everyone else can probably safely cover all bases by contributing as much as they can to both the TFSA and RRSP. If they save predominantly in one vehicle rather the other, they are still likely to come out ahead because what matters most is that they saved for their retirement, not which savings vehicle turned out to be marginally better in retrospect.

You may also be interested in what The Wealthy Boomer and Canadian Financial DIY have to say on the topic.

Bookmark: