The ideal time to jump into investing is after a huge stock market decline like we saw in March 2020.
Lots of investors have done that and they’ve made out exceptionally well. Kudos all around. Since then, we’ve had second and third waves of investors looking at stocks for themselves or for their children and grandchildren. Recently, a reader asked about getting his 13-year-old grandson into investing. “How can we set up an account that I would manage and that we agreed on together?” this grandfather asked.
Parents and grandparents of the nation are doing a good thing in helping make young people familiar with the stock market. Young adults moving into the work force today and in the future will need to rely more on stocks to reach their financial goals than previous generations. The rise of gig work, declining pension coverage in permanent jobs and low interest rates are a few reasons why this is so.
But now is a delicate time to get into investing if your motivation is capturing some more of the phenomenal gains we’ve seen since the 2020 crash. We are way closer to the peak of the current cycle than the bottom. Economic disappointments caused by a lacklustre recovery from the pandemic could hurt stocks badly.
So if you’re getting a young person into stocks right now, temper their expectations. Highlight the ups and downs of investing in stocks, and how they produce strong average annual gains over the long term. It’s tough to do, but discourage day-to-day score keeping. Explain that when stocks fall, and they absolutely will at some point, declines could be painful. The right response is to add more money to a well-built portfolio, not flee.
Children who have not reached the age of majority in their province (18 or 19) cannot open an investing account themselves. One alternative is to set up an informal trust, which some investment firms refer to simply as in-trust accounts. A quick tax primer: Dividends and interest would be taxed in the hands of the parent or grandparent, while taxes on capital gains are payable by the child. If contributions to the account are made with money from the child’s part-time job earnings or from the Canada Child Benefit, then all income is taxed in the child’s hands.
Another way to get kids into stocks is much simpler, even if it circumvents rules designed to prevent minors from getting in over their heads with investing. Open an account at a brokerage and either trade on behalf of a child or allow them access. I have heard of multiple cases in recent months of parents doing this and, once their kids have proven themselves, allowed them to manage the account.
A better way: Team up with your kids and grandkids and discuss trades before making them. It’s great to have aced the past 18 months as an investor, but let’s get real. We’ve seen a rising tide that has floated almost all boats. In a more normal investing environment, it’s going to be harder for investors of all ages.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
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Are Chinese tech stocks worth the risk amid the crackdown?
It is easy to understand why Chinese tech stocks look so tempting to so many value investors. The share prices of China’s tech giants have plunged since Beijing launched a crackdown on the sector’s high fliers. If you buy the notion that Beijing’s goal is to humble the tech sector but not demolish it, these stocks may now qualify as bargains. But that is, at best, a risky bet. Ian McGugan shares his thoughts.
Stimulus-pumped stocks at risk as warning signals flash red
Sky-high valuations and signs that the flood of cheap cash washing around financial markets may be subsiding suggest the record-breaking run in shares is about to hit the buffers. Banks including BofA, Morgan Stanley, Citi and Credit Suisse this week told clients to trim exposure to stocks. As Reuters reports, some are predicting a sharp fall in prices.
Investors betting on ‘stable’ choice of Powell renomination at Fed
A potential renomination of Jerome Powell at the helm of the U.S. Federal Reserve would provide a needed sense of stability as the central bank prepares to pull back its emergency-level support, investors say, even while some chide the Fed chief for policies they say have pumped excessive liquidity into markets. David Randall of Reuters tells us why Wall Street is widely expecting that Mr. Powell, who was nominated for the role by president Donald Trump in 2017, will be renominated by President Joe Biden for another four-year stint.
Number Cruncher: Why these 15 TSX stocks trading near recent highs are worth a look
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Ask Globe Investor
Question: I have a little U.S. money in a U.S. cash account and I would like to invest in a non-registered investment – but not have the tax ramifications. I see there is the Harvest Healthcare Leaders ETF, which is denominated in U.S. dollars and pays its dividend in U.S. currency. Am I right that there would be no withholding tax on this investment? Are there any others of this type that might also be considered to keep my money in U.S. funds but on the TSX?
Answer: Yes, there are several ETFs that trade on the TSX and are denominated in U.S. dollars. However, they do not escape the withholding tax on U.S. dividends when held in non-registered accounts. You simply don’t see it. The tax is an expense to the fund and is deducted before the results are published.
Here’s what the iShares guide to foreign withholding tax has to say:
“While most countries impose some level of withholding tax on dividends paid to foreign investors, the exact amount that Canadian ETF investors are required to pay can vary depending on geography and asset class, as well as the structure of the exchange-traded fund and whether or not the ETF is held in a taxable or non-taxable investment account.
“When choosing which product to use, tax implications should be weighed against other product features, such as the investment strategy of the fund, its overall liquidity and management fees.”
What’s up in the days ahead
Our David Berman this weekend takes a look at where markets may go from here. There’s much to be cautious about: Valuations are high, economies are cooling and central banks are looking to tighten up policies. But does that mean it’s time to take some risk off the table?
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Compiled by Globe Investor Staff