Tag: Investments

Resolutions and Buckets to Do (and Save)

Building Wealth, Finance|Wealth, Tax & Legal Matters

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New Year resolutions

A New Year – a time to make resolutions, be optimistic, and crash! We all start the year with great intentions, but before the end of January, most of us have fallen back to our old habits.

Moving Forward

In order to get anywhere, we have to keep moving forward, even when we have a few set backs. Moving forward gets us to where we want to go, it helps us grow, and it makes life fulfilling.

Setting Goals

As a Certified Financial Planner® I start my client’s journey by diving into what is truly important to them. To be a fiduciary, I must ensure that your goals guide our decisions (it’s not about telling you what to do based on sales targets, product pushes or my own income). Clarity is truly understanding you and is vital to ensuring your forward progress. Of course, that doesn’t mean we don’t redirect as new curves in the road present themselves.

Investment Policy Statement

An Investment Policy Statement (IPS) is developed to ensure that recommendations align, not only with your goals, but also with your investment confidence and experience levels, your ability to manage risk, and your anticipated timelines. An IPS is a guidepost that should also highlight your social and moral beliefs when it comes to the alignment of the products that build your portfolio.

Data Collection

Once we truly understand who you are and what is important to you, we need to have a clear picture of where you are today. I like to think of this as the “start of the year organization of all your important documents.”

What assets and liabilities do you have? What terms and rates are you carrying on your debts? What types of investment accounts do you have? What investment holdings are in your portfolio? How does your business integrate with your personal finances? Understanding where you are currently is the basis of creating Confidence to where you are going.

Taxation

Taxes are your greatest expense – not only today, but also in retirement. Taxes appear in your business, affect your income, and impact nearly every purchase you make. It’s essential that there is a clear understanding of how taxes work today and a realization that no one truly knows what taxation will be like in the future.

Buckets?

We often use the bucket analogy to illustrate how we save. Remember taxes? Different type of accounts are taxed differently (Should I Invest in a RRSP or a TFSA). And because we don’t know the future tax implications on our withdrawals, we want to ensure that we build in options (different buckets of money) to help manage our tax rates now and in retirement.

Investment Buckets for Taxation

The Canadian Tax system is complicated! (Marginal vs Average Tax Rate). We have RRSP accounts that we deposit pre-tax money into and pay tax when we withdraw. This is a great option to manage taxes today and help boast the benefits of compounding. Because it can create a tax problem in retirement, we want to balance our savings.

We contribution to a TFSA account with after-tax money, but all growth and withdrawals are tax free.

We purchase a home, which on sale, is currently eligible for the principal residence exemption, so any increase in the value of that asset is tax free.

Commercial and recreational real estate is subject to capital gains tax, the inclusion rate is currently 50% as taxable income.

Your professional corporation often qualifies for the Lifetime Capital Gains Exemption, which is expected to increase to $1,000,000 of tax free capital gain.

Then we have insurance products – for a brief on that, follow the link.

You get the idea – lots of buckets!

Buckets for Withdrawal?

And then we also have buckets based on asset allocation. Business ownership, including stocks, and fixed income, including bonds, are structured to help ensure that you don’t have to sell those critical businesses when market values are down AND you can maintain your lifestyle knowing that you have the cash and fixed income buckets to draw from while you wait for the markets to recover allowing your business bucket to overflow and refill the cash and security buckets.

 

 

 

 

 

 

 

 

Flexibility

Having different investment buckets from which you can draw from in retirement will be critical to allow you to live the life you dream of and help manage your future taxation. Understanding the sweet spot of where your taxes are today in balance for tomorrow (based on our current tax regime) will help you make smart financial decisions

Staying on Track

Just like with New Year Resolutions, falling off track is easy. It’s a lot easier to stay on program when you have a coach in your corner. Someone who understands you, your occupation, and the financial world will ultimately put you on the path to Controlling your buckets, your future, your dreams!

Advisory

As your Chief Financial Officer, I am here to help you set up all the buckets that will provide you with the flexibility you’ll need. Helping you understand your money and assisting you in making smart financial decisions about your debt repayment, insurance protection, tax management and wealth creation, are just some of the ways that I work as your fiduciary.

Have more questions than answers? Educating you is just one piece of being your personal CFO that we do. Call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission of Empowering You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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A Good Business is Not Always a Good Investment

Accounting Basics, Building Wealth, Finance|Wealth, Resources

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To understand when a good business isn’t a good investment, you need to understand what makes a business good and how they are priced.

A Good Business
When we talk about investing, whether it be buying an optometric practice or a stock, a good business can be easily defined as one that shows revenue growth, easily pay its debts and generates sufficient income to pay its owners a dividend. A good optometric business should have full calendar bookings and illustrate a strong patient base. A good investable business should have the ability raise revenues to keep pace with inflation and the need to pay its people well. A good business should have a board of directors that have a clear vision for the future.

A Good Investment
The reason a good business isn’t necessarily a good investment is based on the price you pay. This is typically referred to as the Price per Earnings ratio for most investable business shares. When purchasing an optometric practice, we often refer to the “multiple”.

EBITA Multiples
Private businesses are typically sold in large portions rather than a share at a time. Regardless, the value of the business is often determined as a multiple of the earnings of that business, specifically the Earnings Before Interest expense, Taxes & Amortization.

However, what is included in expenses will vary. Currently, when selling from one doctor to another, a 3X multiple of EBITA is often used. However, when aggregator corporations are looking to buy, you will likely hear 5X, or higher, as a multiple being used.

I Like 5X Better than 3X
On the surface, a 5X multiple sounds better but it rarely represents a significant difference from the 3X multiple. I know, confusing. The biggest reason is that the calculation of EBITA will vary.

Typically, in a private sale, expenses deducted prior to calculating EBITA does not include any of the owner optometrist direct payments, whereas with a larger corporate buyer, EBITA will be adjusted such that the expenses do include the normal and customary costs of having to hire all optometrists for the clinic.

16.9X P/E on Investments
Let’s shift a bit now to investment businesses. As of September 30, 2022, the S&P/TSX Composite markets had an average price to earnings of 16.9X.

Essentially this means that if you were to buy into the aforementioned market that day, you would have paid 16.9X the average earnings per share of all the companies listed. Think of it this way: It would take you nearly 17 years to recoup your costs if earnings for the business don’t increase.

Is that a good price?
Well, it depends. Let’s look at the stock price and earnings for CISCO, an American-based multinational digital communications technology conglomerate headquartered in California.  This has been a very profitable business, growing it’s net income by 315% from March 27, 2000 to September 28, 2021.  It’s a really good business.

However, if you bought the business on March 27, 2000, when there was a lot of upward speculation for the growth of the company and trading was at a peak, you would have paid 226X P/E. That’s really expensive.

And even with the growth CISCO saw through to September 28, 2021, your investment would still be down 33% on market stock price. That’s a bad Investment.

The Price You Pay
The price you pay for an investment is one of the key determinants on whether or not you have a good investment. It might not be everything, but price really does matter a LOT. If you are buying a new practice, you want to be able to pay it off in a reasonable time period. If you are looking for a good investment, you want a good business at a good price, and when markets are down, there are definitely some good bargains to be had.

Advisory
As your Chief Financial Officer, I am here to help you make smart investments, whether it’s buying a practice or upgrading your portfolio. Helping you understand your money and assisting you in making smart decisions about your debt repayment, insurance protection, tax management and wealth creation, are just some of ways that I work as your fiduciary.

Have more questions than answers? Educating you is just one piece of being your personal CFO that we do. Call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission of Empowering You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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Basic Principles of Investing

Building Wealth, Finance|Wealth, NextGenOD, Resources, Sponsors

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You invest in many things. You invest in your education, your home, a new car. You might even invest in the stock market or by purchasing your own practice. Some of these investments will do well and others…maybe not so well.

We’ve discussed it before – that unless you are investing in a classic car that has shown significant appreciation to collectors, your vehicle is not an investment. Your home can be in a similar predicament based on your entry price, repairs needed, and time horizon. I do hope that your education has been a worthwhile investment showing a great return to date!

Today, let’s focus on what most people consider to be investing: the stock market!

Investing in Good Businesses
It probably goes without saying- the best investments are those in businesses you know and understand. Investing in yourself and your practice is, in most cases, a very good investment. By being actively involved in your business you have the capacity to control your future success of the overall investment.

When it comes to investing in other peoples businesses or the public market (stocks or mutual funds as an example), do you take the same approach? Do you look at the business in detail? Do you analyze their financials? Do you interview the key decision makers? Do you review the mergers and acquisitions and expansion policies?

And what makes a good business ‘good’?

Definition of a Good Business
Just like in making your decision to purchase into an optometry practice, making investment decisions in the private and public markets should be based on the same sound principles.

Does the business make more money than it spends? Does the business have significant competition risk? Are you getting in for a good price? You wouldn’t buy an optometric practice that ran a deficit every year and held significant debt, would you?

Financial Capacity
Market price is one thing, but it doesn’t tell you the profitability of a business. It tells you what someone is currently willing to pay for the business. And because the vast majority of people don’t buy stocks based on sound business principles, these offers can be low or outrageously high.

What does it mean for a business to spend less than it earns? First off, the business needs to create revenue in excess of their expenses. Sounds simple enough on the surface until we take a deeper look. Does the business have excess profits to continue to meet their debt obligations? Are they reinvesting in themselves to continue to grow and expand? And as an owner, are they making enough money to pay you a piece of the rewards of ownership? Personally, If I’m taking on the risk of owning a business, any business, I want to get paid along the way for taking that risk.

Sustainably Profitable
We want businesses that will be here for the long term. True investing involves a longer term buy and hold position. You typically wouldn’t buy a practice with the intention to sell it within six months, would you?

The same is true for your external investments- you want businesses that you know will be around for the long run. You want businesses that won’t disappear if inflation gets too high. Businesses that are ultimately difficult to live without, difficult to replicate, and difficult to compete with. As an example, one of the easiest businesses that fits that definition would be a railroad. Can you imagine someone trying to recreate a railroad across Canada today?

Price Matters
When we look at optometric practices we often hear terms like 3-5 times EBITA  (see more about this in our article on How to Read Your Corporate Financial Statement).  Similar to EBITA, the stock market uses a Price to Earnings ratio. What price is the company selling for in relation to its earnings? The price is determined by the market price per share multiplied by all shares issued. For example, Shopify was trading at 350.08 price to earnings on June 3, 2022. Is that reasonable? If we apply the principal of time, this is saying that it would take you 350 years to recoup your cost to buy Shopify based on their profits alone. I’m pretty sure I won’t live that long.

Speculating vs Investing
Sticking with our example of Shopify, on March 25, 2022, the stock was trading at just 29.53 price to earnings (PE). If you had bought it then, you would have paid, in my opinion, a far more reasonable price for it as the 2021 year end net income per share was recorded at $23.38.

So how did Shopify get to a 350.08 PE valuation a couple of months later? Someone was willing to pay an inflated price for it under the assumption that they could sell it to someone else at an even higher price.

Let’s face it, we all want to make money investing. However, when you buy a business based on hopes of resale rather than the underlying value of the business, you are really speculating, more commonly known as gambling. This is not sound investing. And remember, for every person you hear about that makes a lot of money on a speculation gone right, you aren’t hearing about all the people who lost that money on their speculation gone wrong.

Sleep is Good
The stock exchange markets have been very volatile this past bit. We’ve seen it happen with Reddit and Gamestop; or Trump and a Tweet. Someone says something and it spread like wildfire. Is that enough to know you are making a sound investment?

If your crazy neighbour is leaning over the fence and making grossly overpriced offers to buy your house one day and low ball offers the next, does this truly indicate the value of your home? Emotional attachment to your home aside, this is just your neighbour being speculative. This can be very unsettling.

If you know that you own good businesses and that you purchased them at good prices and that they are paying you appropriately to own them, it’s a lot easier to sleep at night.

What is your goal?
Investing is designed to save for your future. Your future home down payment, your future dream vacation, your future freedom from work. Investing should be in businesses that can fulfil this requirement.

Personally, I want to see my money earn me money. I want the businesses I own to pay me. I want to be able to sleep at night and not be worried that doubling down on black might make my savings disappear in a single spin of the roulette ball.

Advisory
As your Chief Financial Officer, I’m here to help you understand your money and assist you in making smart decisions about your wealth.

Have more questions than answers? Educating you is just one piece of being your personal CFO that we do. Call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission Empowering You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

Reference for Shopify: https://ycharts.com/companies/SHOP.TO/pe_ratio and Sedar.com

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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Why Would I use Insurance as an Investment?

Building Wealth, Finance|Wealth, Resources

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Did you even know insurance can be an investment tool? Why would you ever want to do such a thing? Well, the simple answer is taxation.

Permanent Life Insurance
Two general forms of life insurance can help build your wealth.

Universal life insurance is like a term to age 100 policy that has a side investment account. You have the option to use the side account at any time. This is a great feature as you can secure the life insurance coverage you need today and hold onto the investment contribution room until you have excess cash to deposit.

Similar to purchasing mutual funds, a universal life insurance policy usually has a small selection of funds to invest in.

Whole life refers to a life insurance policy that has a dividend. The dividend can be set, often called non-participating, or it can be variable and dependent on an investment pool created and held by the insurer, called participating.

There are many dividend options to pick from and you should review your selected option from time to time to ensure the policy is still meeting all your needs. In most cases, a paid-up addition dividend option will help your policy values increase and typically outpace inflation so that the purchasing power of your benefit is maintained at the very least.

When you purchase a permanent life insurance product, you will be provided with an illustration that shows how the cash values might grow in the future.

Like any investment, there is no guarantee of long-term performance and typically these policies are designed for the long term as we want you to live a long and fruitful life. It is therefore important to also see the illustration of values showing 2% less growth so that you have a better understanding of some of the risks.

Risk?
All investments have risks. Having said that, the risk built into a life insurance contract is typically far less than the traditional marketplace.

Because the insurance company relies on their own investments in order to take your premiums and grow them to a point where they can pay claims, they tend to select lower-risk investments, have access to institutional funds, and lower management fees than many individuals do on their own.

Beware of illustrations that show you a high rate of return and minimize your premium payments by showing a high dependence on policy growth. It was quite common before the end of the last century to illustrate policies with double-digit growth.

The reality however was that most companies had to greatly reduce their growth payments and these policies started to implode. That policy that you thought would be there for life and provide a retirement supplement, was quickly disappearing to cover the base insurance cost.*

*If you think you might have an imploding policy, ask your advisor for an in-force illustration using the current growth rate and another showing 2% less. There are options to salvage what you have left if you act sooner rather than later.

Can Insurance Create Retirement Income?
Here is where things get interesting. A healthy life insurance policy with a decent investment side account can serve to not only cover your estate taxes at death, clear your debts, and provide a legacy to your family or charity, it can also be used to fund your lifestyle or other expenses while you are alive.

Typically, the value of the policy can be used as collateral for a bank loan, a policy loan (where you are your own banker), or partial surrender. There are various options depending on your need and long-term desires.

What About the Taxes?
When investments grow inside a life insurance policy, as long as the deposits stay under the contribution line, they grow tax-free. Keep in mind, that how you remove the money later in life may create a taxable event. Typically, if you access the money through a collateral or policy loan, there is no taxation.

Business Owned Policies
Here is where it gets really interesting. Growth from investments held by your business are deemed passive income and are taxed at the highest business tax rate. So being aware of the tax-saving opportunities for business investments is important.

Using life insurance can provide a great option for sheltering some business funds. Again, how you access these funds may trigger taxation – so you need to be aware of all the ins and outs of what you are trying to accomplish.

We didn’t even mention how investing in your life insurance contract can help you preserve the small business deduction tax rate on your active income!

When using a business-owned policy, you also need to be aware of how this investment and your life insurance coverage would be impacted by a change of business ownership.

Advisory
As your Chief Financial Officer, I’m here to help you understand the various tools available to you and your business to build your wealth. There are many factors to consider and understanding your goals is key to building a plan that serves you today and well into the future – as your life changes.

Have more questions than answers? Educating you is just one piece of being your personal CFO that I offer. Call (780-261-3098) or email (Roxanne@claritywealthadvisory.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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