Monthly Archives: October 2017

Socially Responsible Investing in Canada

Dancing Tango for “A Closer Look.”

Recently my friend Elijah asked me about ethical investing. His concern is that he doesn’t want any of his hard earned money going towards oil companies.

I sense that Elijah is really interested in socially responsible investing (SRI). The idea goes by other names such as: green investing, ethical investing, sustainable investing, impact investing, or socially conscious investing.

In general, Elijah and millions of others like him want to avoid investing in companies involved with alcohol, tobacco, gambling, pornography, weapons, human rights violations, or poor employee relations.

At this moment Elijah is invested in a the TD Canadian Index e with 20% allocation towards the energy sector. For this index he pays 0.32% management fees. He makes a monthly contribution of whatever he can afford.

I did a bit of searching and I found:

  • Jantzi Social Index Fund (XEN) This is a Canadian ETF with 16.82% allocation in the energy sector and 0.55% management fees.
  • iShares MSCI KLD 400 Social ETF (KLD) in the US. with 0% Energy and 0.5% management fees.
  • iShares MSCI KLD 400 Social ETF (DSI) in the US. with 0% Energy and 0.5% management fees.

In short, ethical investors don’t have much choice.

If you invest in the US and want to avoid oil, one option is to buy all the sectors except the Energy sector if this is the sector that worries him the most, but this option is a bit unrealistic if he’s only investing $100 or $200 per month. And all the other sectors have companies that would not qualify as socially responsible investing.

As opposed to the US, the Canadian market is so small that there are not ETFs or index funds which separate different sectors of the Canadian economy.

Another option is to buy individual stocks and only buy those stocks which meet his criteria. But again, this will expose him to risk of lack of diversification and he doesn’t have that much capital.

One of the problems with ethical investing is that people’s moral values are different.

Some examples are clear cut. If a company makes bombs or machine guns, there is no doubt that those weapons are for killing people and I think that most ethical investors would want to avoid those companies.

But what about companies like Walmart? Some people say that it violates human rights because it prevents workers from forming an union. Other people say that Walmart is a savior for poor people by providing good quality products at low prices.

Another example is a chicken farming company. Some people say that it provides affordable chicken and eggs to the masses. Other people say they represent cruelty against animals.

A winery in California. Millions of people see nothing wrong with drinking a glass of wine after dinner. Others see the sale of alcohol as a complete violation of their moral principles.

And to address Elijah’s distaste for oil. We depend on oil products every second of our modern life. From the plastic keyboard on our computers to the plastic toothbrush we use every morning. We can get our oil from the oil sands in Canada (this is considered dirty oil) or we can get it from the middle east where there are constant human rights violations, but there is no replacement for oil derivatives products in modern day society.

Sure, green energy is advancing rapidly but I don’t see how green energy could replace all the plastic, rubber, and other chemical byproducts which are derived from oil.

The truth is that a portfolio is not the best way to express one’s moral choices.

Let’s imagine two companies: “Good Company” and “Bad Company”

Both companies have shares in the stock market for $10 and both companies pay $1 dollar in dividends every year. In short, return for investment is 10%.

A campaign against Bad Company and in Favor of Good company moves the share price of each company. Now Good Company shares cost $20 and Bad Company shares cost $5. But regardless of their share price, they still pay $1 in dividends.

As an investor, if I pay $5 in Bad Company for my $1 of dividend, now I make 20% return on my investment. If I pay $20 in Good Company for my $1 of dividend, now I make 5% return on my investment.

In the stock market, the Bad Company shareholders will be rewarded and the Good Company Shareholders will be penalized.

How to create an impact

The best way to create an impact is to vote with your dollars. As a consumer your voice is much louder and corporations eventually listen.

For example. My friend Cheryl has been a vegetarian and then a vegan for many years. When I met her she was the odd person with the different eating habits, but little by little the vegetarian and vegan community has continued to grow. Now there are more and more vegan restaurants all over the city. Cheryl and millions of other vegans have voted with their money and corporations are listening.

Another example is the company Gucci which announced that they will no longer use fur in their designs. Obviously they are responding to demands of the consumer. The consumer has spoken and Gucci is listening.

You can have a much bigger impact as a consumer than as a stock holder

The best way to change a company’s behavior is not by buying or selling its share in the stock market, it’s by buying or not buying its products. If you and millions of others boycott their products, management will realize that they have to change quick.

Other ways to create changes is to lobby government and ask government not to buy products from those companies.

You can also express your SRI with your political vote. For example, in the US, the people voted for Donald Trump, a person who denies climate change and who wants to revive the coal industry at the expense of cleaner sources of energy. Many people who care about the environment  didn’t bother to vote, and so, they have to live with the consequences of having Donald Trump as president.

In short, you will have a bigger voice if you express your SRI by the way you consume and by the way you vote than by the way you invest in the stock market.

Make sure you get an unbiased financial adviser.

Elsa from the film Frozen

Picture this scenario

It’s RRSP season. You see advertisements in all the metro stations, all the TV stations and all the social media. You have until March 1st to make your RRSP contribution and to get that tax break you have been hearing about.

You make an appointment with the financial adviser at the bank. You get one hour. In that one hour, your financial adviser, anyone who happens to be available at the time, gives you a questionnaire. From this questionnaire he’s supposed to assess your risk tolerance and present you 5 or 6 mutual funds which fall into your risk tolerance. Sing here, sign there, initial here and here and we are done, thank you very much. Next…

Asset allocation is one of the most important decision an investor must make and yet, we give it so little time, so little consideration.

There are a few problems with this scenario.

  1. The client and adviser don’t get to know each other. The adviser don’t discover anything about the client’s goals, knowledge nor expectations.
  2. The adviser only show the client the products offered by the bank. Most of the time the adviser will try to nudge the investor into actively managed funds, these are the funds which offer the highest revenue to the bank and thus the lower revenue for the client.
  3. If it is a Financial Advisory firm, not affiliated with a bank, the firm will definitely push actively managed funds. They would never suggest index funds nor low cost ETFs and on top of that, they will charge an additional management fee. They will do what I call “double dipping.”

What’s the solution?

  • The solution is to look for a fee-only financial adviser. These adviser will charge you for their time. They have no conflict of interests, they won’t try to sell you products.
  • Have a long conversation with your adviser. Let him know about your plans, your goal, your knowledge, your expectations.
  • Take a holistic view of your situation.  Are you planning to work after retirement? Do you have other investments? Are you planning to leave a money for your heirs?
  • Build a long term relationship with your adviser, but continue informing yourself. If at any moment you detect conflict of interest, you suspect that he is charging but getting a commission somewhere else, his opinion in no longer unbiased and you should question his decisions.
  • Make sure that the products he offers you don’t have trailer fees, or other kind of compensations. You want to make sure there is not even the perception of conflict of interest.

Finding a financial adviser without conflict of interests is very difficult but not impossible. If you find him, don’t be afraid to pay him his hourly fee, in the long run you will save a ton of money.

 

Cash is trash. Inflation is the biggest killer of your money

Spending time with friends.

Many people think that having money in cash is the safest investments of all, but in reality, it is the worst investments of all. Having cash money is the only investment where you are guaranteed 100% to lose money.

How do you lose it?

You lose it to inflation, the silent killer of capital.

Why does inflation occurs.

In order to create economic stimulus, governments try to have a stable rate of inflation, both Canada and the US favor an inflation rate of about 2%.

The reason the governments wants inflation is because the government wants to discourage people from holding money. If your money lose value day by day, then you are better off spending in goods and services. If people buy goods and services then businesses make money and this economic activity creates jobs.

Who is the big loser in the inflation game?

The poor and the financial ignorant are the big losers.

The poor are losers because every time prices increases the poor have to pay more for goods and services, but many times salaries don’t increase at the same rate as inflation, therefore the purchasing power is less and less.

The financial ignorant loses out because they don’t know how to invest their money in a way which will produce a rate of return higher than inflation.

Imagine this scenario:

Inflation is 2% and your bank offers you 1% interest for your money, at this rate your money is losing 1% power every year.

Here is the Canada’s rate of inflation for the past 10 years.

2016: 1.50%
2015: 1.61%
2014: 1.47%
2013: 1.24%
2012: 0.83%
2011: 2.30%
2010: 2.35%
1009: 1.32%
2008: 1.16%
2007: 2.28%

It doesn’t seem like much, but assuming you had $10,000 on the year 2007. How much will it be worth today?

Your 10,000 would be worth $8,617.

This means that you lost 13.83% or your money. That’s a big hit.

So what to do?

If anything, don’t hold cash, and don’t get investments which produce less than the inflation rate. Government bonds, generally don’t keep up with inflation.

Corporate bonds do a bit better than inflation, but the best of all are stocks.

Stocks are volatile, but in the long term have have consistently outperformed other investments.

Good luck with your investments.

I am a money coach. If you want to talk about your investments, let’s talk.

Financial Analysis and recommendations: Elijah Baker

Elijah is a friend I met at the McGill toastmasters club. His speeches have always been thought provoking and inspirational.

Elijah is a true hustler. He has several side gigs and job. Due to his many activities he hasn’t much time to think about his financial goals. He only started saving after having a conversation with me about the possibility of retirement or having some money for emergencies.

This interview was held May 2017

Age: 33
Work life: Different jobs at different places and side hustles.
Education: Bachelor’s in communication and music.

Alain: What are your professional ambitions?
Elijah: After graduation, I never wanted to work a 9-5 job. So far, I have succeeded at that.

At “A Closer Look” rehearsal

Alain: How do you earn your living?
Elijah:

  • I have been a musician for years, I do gigs at different bars and events.
  • I teach guitar and drums to a few private students
  • I started a videography company, I do corporate videos, weddings and events with my small business www.triplebottomlinemedia.com
  • I am a teacher at Trebas Institute

Alain: Can you tell me a bit about your financial planning?
Elijah: In the past I have accumulated some savings, but I always ended up spending it.

I haven’t been disciplined about saving because:

  • I didn’t have the motivation,
  • I didn’t have the knowledge
  • It wasn’t that important
  • I never had a steady income

Only recently I have had the capacity to set aside a certain amount of money to save regularly.

Alain: Have you ever thought about retirement?
Elijah: I don’t think that far into the future. I can’t imagine what life would be like at age 65.

I am trying to set up my life so that even at 65 there will be demand for my services. I hope that people will want to have videos made, they will want to listen to my music and will want to learn to play musical instruments.

Alain: Do you have any goal which could affect your financial life? Do you want a house? Kids? Get married?
Elijah: Yeah, probably, but at the moment I am more focus on living on the present.

Alain: So what are your financial goals?
Elijah: I would like to have a bit of money set aside for emergencies. I would like to continue working until old age without the pressure of having to produce every month. I would like to work because I want to, not because I have to.

Diagnosis

The whole idea of financial planning is new to Elijah. He lives a frugal lifestyle and he is happy with it. His priority is to have lots of freedom, not to have a 9 to 5 but not to lack anything either. He doesn’t mind living a spartan life but if he feels like having a beer with friends, or taking a trip to Costa Rica, he would like to have the money to do it without worrying too much about how to pay for it.

  1. We started by opening a brokerage at his main bank
  2. I asked Elijah not to listen to the advice of the financial adviser at the bank. The bank offers actively managed mutual funds with high fees. The more a fund cost, the less money it makes for its investors.
  3. We spoke about choosing and Index fund, a broad based investment products which represent the whole economy of a county.

Actions

  1. Elijah opened an account and deposited some money he had in his bank account.
  2. We chose the Canadian Index Fund with management fees of less than 0.33% per year.
  3. He’s making contributions every month.

Conclusion

  1. This is just the beginning, his present savings are not enough to fund a retirement. After a few months he will have enough money to face any short term emergency.
  2. Our first goal was accomplished, to get into a habit of saving and planning for the future.
  3. In future meetings we will speak about the saving a bigger amount and about how to start diversifying his savings.

Follow up

Next meeting will be May 2018.

Pitch. I am a money coach. If you would like to talk about your financial situation, please get in touch with me.