Like never before, I’m hearing from parents who want to get their teens involved in stock market investing.
This is not a financial literacy story. It’s much more about a raging bull market for stocks that has attracted hordes of new or re-energized investors. The parents among them are keen to share the good news with their teens, just as baby boomer parents want their adult kids to get into the housing market.
Learning how the stock market works is essential for young people to achieve long-term financial success. Only a lucky minority of this group will have jobs with company pension plans, which means they’ll need to invest for themselves to retire comfortably. Stocks have to be part of the plan.
That said, investing in stocks is not a front-rank financial skill for young people who have yet to graduate and take their place in the work force. Here are five more important financial lessons:
- Smart banking: Have a no-fee chequing account for daily banking (widely available to youth and students). On turning 18, open a high-rate savings account with an alternative bank paying a decent rate of interest. Use the savings account to park money that won’t be used in the short term and learn to shuttle money back and forth between chequing and savings using banking apps and websites.
- Saving: Build a habit of diverting a portion of all incoming money from gifts and part-time jobs into a savings account. Understand that the point of savings is not to grow your money, but rather to have money safely parked for emergencies and future use.
- Long-term planning: Planning to go away to university? The time to start saving and planning for this is probably Grade 10. Estimate how much tuition, supplies, transportation and, if applicable, accommodation will cost and then map out how the bills will be paid.
- How to use a credit card: Young adults aged 18 and up are eligible to get a credit card. Parents, encourage this if your child is working and has some income. Credit cards are indispensable in modern banking and it’s vital to learn early about the foundational personal finance rule of spending only what you can afford on a card and never carrying a balance.
- Matching education to job and income prospects: Help a young person make connections between the postsecondary programs that interest them and the job market for people with those skills. Encourage adaptations that help them navigate between the programs of interest and the economic sectors with good jobs.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
iA Financial Corporation Inc. (IAG-T) The share price of this insurance and financial services company is nearing an all-time high and a dividend hike is looming. The stock has a unanimous buy recommendation from nine analysts and a 12-month forecast return of 19 per cent, not including dividends. As Jennifer Dowty tells us in this investment profile of the company, valuations are reasonable, the balance sheet is strong, and there are a number of potential catalysts for a stock rally.
The death of profit: Why investing feels broken, and markets no longer make sense
With interest rates near zero, and with trillions of dollars in bonds once again yielding next to nothing, growth at any cost is back in favour. As Tim Kiladze reports, investors are once again willing to underwrite years of losses in hopes of backing the next Amazon or Shopify.
Fed’s coming taper fans talk of renewed ‘reflation’ trade
The Federal Reserve’s signal that it will soon unwind its bond buying program is bolstering the case in financial markets for the reflation trade, which lifted Treasury yields and boosted shares of banks, energy firms and other economically sensitive companies in the early months of 2021. David Randall of Reuters reports.
Others (for subscribers)
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Ask Globe Investor
Question: My wife and I are in our early 70s and have significant unrealized capital gains in our joint investment account. Is it advisable for us to cash in our gains now and pay the tax, or should we wait until we both die, when others will do it for us? The purpose of selling now would be to minimize the significant amount the Canada Revenue Agency will demand from the executor of our estate. We would then reinvest the net proceeds into similar dividend-paying stocks to continue financing our retirement lifestyle. We could repeat this exercise again in 20 years if luck is still on our side.
Answer: I can understand why you might see some merit in triggering capital gains now instead of waiting until you’re gone. Even though only half of capital gains are currently included in income, your estate could potentially end up paying a big chunk of tax at your highest marginal rate if all of your accumulated gains land on your final tax return at once.
However, in most cases, it’s still better to wait.
“This is a classic question,” Jamie Golombek, head of tax and estate planning with CIBC Private Wealth, said in an e-mail.
“The short answer is that it rarely makes sense for tax reasons alone to crystallize capital gains and voluntarily pay tax today, versus paying it down the road – especially if your intention is simply to buy back the same stocks.”
There are several reasons that waiting could be more advantageous. One key consideration is that, depending on how long you and your spouse live, it could be decades before the gains in your portfolio are taxed.
When someone dies, the “deemed disposition” rules of the Income Tax Act treat the person’s assets as if they were sold and the capital gains realized. However, couples get a break in this regard: If the shares are left to a surviving spouse or partner, he or she can take ownership of the assets at their original cost base, which defers the capital gain until the spouse dies or sells the shares.
“So, unless you need the capital from the sale of the stocks to fund your retirement lifestyle (versus living on the dividend income from those stocks), deferring the realization of the capital gains as long as possible can make sense – assuming you’re comfortable with the stock selection itself,” Mr. Golombek said.
It’s also important to consider the potential reduction of government benefits if you were to trigger capital gains, which would increase your income while you are alive.
“You really need to compare your marginal effective tax rate today to the expected rate in the year of death, taking into account the fact that if you realize capital gains in any particular tax year, this may result in a loss of income-tested benefits – such as Old Age Security, the Guaranteed Income Supplement or the age amount credit – in those years, which could result in a higher marginal effective tax rate,” Mr. Golombek said.
Another important consideration is that, if you trigger capital gains early and pay the tax, you will have less net capital available to invest, potentially for many years. This will not only cut into your dividend income while you are alive, but will also very likely reduce your portfolio’s growth and the eventual value of your estate.
Whether the tax savings will make up for the lost investment opportunity depends on many factors, including your current and future tax rates, your portfolio’s rate of return and how long you and your wife live, Mr. Golombek said. Any increase in the capital gains inclusion rate – which was one of the New Democratic Party’s campaign proposals – would figure into the decision as well.
Mr. Golombek suggests that you meet with a financial professional who can crunch the numbers based on your ages, incomes, rates of return, size of your estate, health and predicted longevity to see whether paying some tax prematurely makes sense for you.
“In my experience, it rarely does,” he said.
What’s up in the days ahead
Lumber prices have come down a lot since the early days of the pandemic. Forestry stocks, not so much. David Berman will explain why.
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Compiled by Globe Investor Staff