## Tuesday, February 20, 2018

### Measuring Returns in Different Currencies

Thinking about returns of stocks in different countries and in different currencies can get confusing. If Canadian stocks rise (in Canadian dollars) and U.S. stocks rise more (in U.S. dollars), almost everyone would agree that U.S. stocks performed better, even if the Canadian dollar rose by enough to make up the difference. This way of thinking makes no sense to me.

Suppose that in a particular year, Canadian stocks rise 10% when measured the usual way in Canadian dollars. In the same year, U.S. stocks rise 15.5% when measured in U.S. dollars. But the Canadian dollar rises 5% during the year. Most would agree that U.S. stocks had superior returns.

However, let’s look at this from a few points of view, starting with a Canadian investor who thinks in Canadian dollars. The Canadian stocks case is easy: a 10% gain. Now let’s consider the case of a C\$10,000 investment in U.S. stocks with the Canadian dollar at 80 cents U.S. The investment is US\$8000 and it rises by 15.5% to US\$9240. But Canadian dollars rose 5% to 84 cents U.S. This converts to C\$11,000 for a gain of 10% measured in Canadian dollars.

So, from the point of view of a Canadian investor, stocks in Canada and the U.S. performed the same, a 10% gain. If we go through the same exercise for a U.S. investor, the gain for Canadian and U.S. stocks will both be 15.5% measured in U.S. dollars. The same will be true for investors in any other country. Everyone in the world will see Canadian and U.S. stocks giving the same performance. So how can it make any sense to decide that U.S. stocks performed better?

This scenario was created to give the same returns for Canadian and U.S. stocks, but we get similar outcomes in other cases. If a Canadian investor sees Canadian stocks perform 5% better than U.S. stocks, then U.S. investors and all other investors in the world will see the same 5% better performance for Canadian stocks over U.S. stocks.

People think that stock returns measured by the country’s own currency are somehow the “actual return”. But this way of thinking is misleading. Returns are always relative. If every investor in the world sees Canadian and U.S. stocks as performing equally well in a particular year, how can it make any sense at all to decide that U.S. stocks performed better? The answer is that it doesn’t make sense.

## Saturday, February 17, 2018

### Foreign Withholding Taxes on New Vanguard ETFs

When Canadians own foreign stocks, taxes on the dividends are often withheld by the foreign country. This can apply with U.S. stocks as well. This is a complex area. The amount of taxes silently withheld and whether you can effectively recover them depends on the country and the type of account you have.

Yesterday, I said I wanted to know the foreign withholding tax drag on the new Vanguard Canada ETFs. Justin Bender has done the analysis. He has a pdf with the foreign withholding tax details for RRSP and TFSA accounts, as well as an article discussing other aspects of Vanguard’s new ETFs.

In a personal note, Justin goes on to explain “The withholding tax drag in a taxable account is only about 0.01% to 0.02% for the three ETFs.” Thanks, Justin.

## Friday, February 16, 2018

### Short Takes: New Vanguard ETFs, Worrying about Stocks, and more

My only post in the last two weeks was about TFSA advice:

Here are some short takes and some weekend reading:

Canadian Couch Potato reviews Vanguard’s new one-fund solutions. They look like excellent single ETF solutions for DIY investors. One thing I’d like to see is an analysis of foreign withholding taxes to help DIY investors make informed tradeoffs between cost and simplicity.

John Robertson has an interesting message for those very nervous about the recent stock market decline.

Big Cajun Man coins a new term for exploiting the elderly with slimy sales practices.

Robb Engen at Boomer and Echo explains that the recent big drop in stocks may have been a record when measured in points, but is far from a record in the sense that matters. Unfortunately, it is mostly media types who hype such “record” drops, and their desperation for headlines will keep them from understanding Robb’s message. Remember the Upton Sinclair quote: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

The Blunt Bean Counter has a guest expert explaining laws related to powers of attorney for personal care and medical assistance.

## Monday, February 5, 2018

I often see advice related to TFSAs and RRSPs that is strange or just plain wrong. I hate to pick on Gail Vaz-Oxlade, but her recent article giving TFSA advice was spot-on except for one puzzling part I didn’t agree with:

You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments.

Why? Well since all the capital gains inside [a] TFSA [are] tax free, it also means any capital loss can’t be claimed [to] offset your other capital gains.

To start with, your mix of investments in cash, bonds, and stocks should be based on personal factors that have nothing to do with the tax properties of various types of accounts. Because few people use up all of their RRSP and TFSA room, all of their savings outside of a chequing account should be in either RRSPs or TFSAs.

If your asset mix includes \$50,000 in cash, perhaps as emergency savings, and you have no savings in non-registered accounts, then by all means keep the \$50,000 in a TFSA. But don’t bias your asset mix to extra cash just to avoid investing in stocks in a TFSA. More cash in your TFSA should mean less cash or cash-equivalents in your RRSP.

If you’re in the enviable position of having used all your RRSP and TFSA room, you get to decide what part of your savings should go in a non-registered account. Suppose your asset mix includes at least \$50,000 cash and \$50,000 in the Canadian stock exchange-traded fund VCN. The question is which to hold in your TFSA and which to hold in a non-registered account.

The best savings account I'm aware of pays 2.3% interest. VCN pays more than this in dividends, but dividends have preferred tax treatment in a non-registered account. Ignoring capital gains for the moment, paying taxes on 2.3% interest in a non-registered account isn't much different from paying taxes on the VCN dividends in a non-registered account.

The choice of which investment to hold in your TFSA comes down to the capital gains. Over a single year, VCN may be up or down, but over decades, it’s far more likely to be up than down. It’s better to get your capital gains tax-free than it is to worry about keeping your capital losses. If getting capital losses over the long term is likely, then you should re-evaluate the way you invest.

## Friday, February 2, 2018

### Short Takes: New Vanguard ETFs, Tied-Selling, and more

Here are my posts for the past two weeks:

The Incredible Shrinking Alpha

I’m Done with RRSPs

Your Complete Guide to Factor-Based Investing

Here are some short takes and some weekend reading:

Rob Carrick reports on new ETFs from Vanguard that contain both bonds and global stocks.

Big Cajun Man explains the regulations against tied selling by banks. They apply to such things as requiring you to get a chequing account with a bank in order to get a mortgage.

Robb Engen at Boomer and Echo discusses using annuities to create your own pension income. He says “I perked up when I saw the payout rates were between 5 and 7 percent of the initial deposit. Now, keep in mind, those rates won’t increase with inflation each year, but it’s still a healthy (and guaranteed) amount to receive for life. … why wouldn’t a relatively healthy 70-year-old male not want to turn \$250,000 into annual income of \$17,669.89?” He’s downplaying the devastating effects of inflation over many years. I’ve watched older family members struggle to get by as the buying power of unindexed pensions erode. People should really be looking at annuities with increasing payouts to counter the effects of inflation. The starting payouts are lower, but this gives a better idea of the annuity’s actual returns.