The beginning of the year, then tax season, and now spring, all require actions for the portfolio and, for me, a closer look at my holdings and accounts.
The New Year brings contribution room to the Tax-Free Savings Accounts; the Canadian sibling to the Roth IRA. With full accounts for both my husband and myself, this means I have only the new annual contributions room: $5,500 per person of cash or shares or a combination of both eagerly waiting to be contributed and in the case of cash, also deployed.
For my account, the last remaining shares of Royal Bank (NYSE:RY), and TD Bank (NYSE:TD) in the non-registered account were eagerly waiting to be contributed to join their twins. Sadly, this triggers a capital gain in the non-registered account, but the share counts contributed this year are paltry in comparison to what was moved last January. With a stroke of luck, I was able to shelter in the TFSA all this year's gains in the bank stocks! Now, all of my RY, TD shares are sheltered. It is debatable whether these holdings are best suited to the TFSA, but as very long-term holdings, they will happily grow, tax free for, hopefully, many, many years to come. I also moved a few lots of my Manulife (NYSE:MFC) shares and a bit of cash to top up the contribution to the maximum dollar amount, but the majority of my MFC holding is elsewhere. Cash alone moved into my husband's TFSA. It seems rather inconsequential in the big picture, but these simple shifts change the portfolio make up as I try to juggle these 'closed' accounts, keep the 'orphaned' cash to a minimum plus keep things homed in their most tax-efficient manner. Maybe a more reasonable goal is to aim for "at least somewhat of a tax advantaged manner."
Tax season brings two separate waves of changes to the portfolio. As my husband is in the third tax bracket and expects, for health reasons, to have some years between age 55 and 65 as retired, but low income (we have no pensions, just the portfolio), using the registered retirement plan strategically makes sense for our situation. We can contribute now, receive the tax dollars back at 36% to invest, and during those early retirement bridge years between actual retirement and social benefits, pull out RSP funds, likely paying a smaller portion of those tax dollars in the future. It should not be a problem to control the withdrawals to stay within the 25% bracket or even lower.
With this in mind, for the last two weeks in March, I searched the portfolio and pockets for shares and cash that would be advantageous to contribute to the retirement account all while keeping in mind our contribution room, what type of shares would be better homed in a retirement account, and watching that tax bracket target number to not contribute too much so that we bump down into the next lower tax bracket. This year, we contributed a record amount to the RSP accounts - more than our expenses for the entire year! Despite the fact that we keep our expenses quite low, it is still an impressive number.
Once that flurry of activity is done, there is the job of what to do with the rather sizeable refund, which, I am very pleased to report, arrived in our account within five business days. I think that is some sort of a record! Way to go CRA! If you think dealing with a nice tax refund is a no-brainer, or cause for some celebratory spending, you do not live in my carefully-stewarded, frugal world!
And, of course, there is the contributed cash and the refund to invest as well: I'm swamped!
And then, it's spring! You may wonder what that means for the portfolio. I am dazzled by the return of sunshine to our Canadian home and am eager to get outside without all the bundling that was required last month! It amazes me how low to the horizon the sun's daily zenith gets and how quickly it has popped back up to a more reasonable trajectory. Warmth is definitely returning to it. My secondary mode of transportation, my bicycle, (walking is primary) has returned from the shop already, and today, for the first time, though the roads are not yet free of snow, ice, and debris, my trusty steed and I ventured into light daytime traffic. My field of travel blossoms with the earliest flowers. Though I love my home office, it is easy to find other duties requiring travel outdoors to occupy my time. I have, and want to spend less time staring at my computer screen.
Aside from getting out more often, spring also means I am rather busy in other areas of my life. I am occupied by tax season this year only as a volunteer tax preparer, a very happy tax role that fills any spare spaces in my weekdays. Annual conferences and family events fill my April weekends.
Spring also seems to affect stock prices. "Sell in May and go away" is a popular adage that reflects the seasonality of the markets. Though I do not follow that, I do get more cautious in the spring. This spring seems to have some very good reasons for caution. Despite the rhetoric reflecting the sounds of the last few years, there are some underlying differences. Headline themes like, 'Rising Interest Rates', 'Overvaluation of the Markets', and 'Political Instability' though very similar to last year, are a little closer to home this year and definitely more poignant. It is another reason to take an analytical gaze at the portfolio to evaluate what may experience weakness or a higher-than-average drawdown if there is market instability.
Actions I have and will take point less towards fear of a market downturn and more towards positioning for buying opportunities. I want to have ample cash available for a summer dip. It is also time to look again at more stable, steady investments like utilities that I will confess, have never had as much of an emphasis as they should. As the portfolio has grown to the point of providing for our spending needs, but not overly comfortably, I am naturally taking a more conservative viewpoint. Over the last six years, the portfolio has been built basically from scratch, and now that we have reached the tipping point of financial freedom, Warren Buffett's Rule Number One reminding us to not lose money is more relevant. Of course, I violated that in a record way last year, but plan not to do that again. This has me looking critically at each of my holdings to see who might disappoint.
Lastly, spring is my season for donations. It may seem a little counter-intuitive as I do not receive the tax credit and resulting refund for the donation for a long period of time, but it works for me on several levels. The portfolio is already in a state of flux. When deciding what to contribute to the retirement account I can also decide what is best donated. Donations of qualified investments to qualified donees eliminate the Capital Gains tax. It makes sense from a tax perspective to donate the best of the winners instead of writing a cheque to support our favorite charities. The donation rule makes sense from a tax perspective as the funds in a non-registered account are post-tax already and the gains are not kept by the donor. It also makes sense for me, as I may as well donate shares that have appreciated than cash in my pocket with tax money owing at a future sell date on the shares.
I think a spring donation works well for the donees as well. It is easier for them to fundraise during the Christmas time frame when people are feeling more generous and looking toward reducing the upcoming tax bill. The summer is often a slim period for them.
I have nice gains in Parkland Fuel [TSX:PKI] (OTCPK:PKIUF) and Manulife Financial. Shares of each of these will be donated to several of our favorite registered charities through a foundation that has ties to these charities. This gives me the opportunity to reduce exposure to these companies in the spring, without realizing the gains. If the share prices should drop during the summer, it also leaves me room in the portfolio, percentage-wise, to purchase more shares.
Though I have no significant losers in the portfolio now, it would also make sense to sell off losers to capture the capital loss, even to move sideways to a near competitor and stay in the industry. There is no need to wait until the end of the year for tax-loss selling. Often stocks which are weak during the seasonally strong first and second quarters do not do well over the summer either. I would certainly take into consideration whether there is the likelihood of a better upcoming earnings report and other fundamental factors before deciding to sell.
This time of year, each holding in each account is scrutinized, less so for fundamental reasons affecting each company, which have been followed all year, but more for portfolio fit and asset location.
One of the main questions I have asked myself is that if there was more than just a little market dip or a correction (usually defined as 10%) how would I react to each holding. Would I be concerned about the performance of the holding or eager to purchase more shares at a discount? Of course, reality is far different than simply thinking 'what if', but it is a useful exercise nonetheless. Often that quick first reaction reflects the depth of my study into a holding, or broader concerns about an industry. It is essentially a judgment call on the risks contained within my holdings.
This exercise also provides a quick sort of my holdings. Some of my holdings can be classed into "hold forever" with the definition of forever, including assumptions about the ability of the company to adapt to its changing environment. I tend to not believe in "forever" stocks, as I think one of the great benefits of being an individual investor is the ability to be free from the constraints of a fund, and quickly exit if things head the wrong way fundamentally. This group is as close as I would come to 'hold forever' and includes companies like Bell (NYSE:BCE), Royal Bank, and my other Canadian banks, and Enbridge (NYSE:ENB).
Foundational stocks are those that are maybe not hold forever, but are certainly core holdings, but ones that are watched a little more carefully. Growth holdings are ones that are purchased more for their growth prospects than their dividends. These are naturally more volatile. The trades and options column are holdings, some of them like Painted Pony Petroleum [TSX:PPY] (OTCPK:PDPYF) and Tourmaline Oil (OTCPK:TRMLF) that were recently purchase trades for capital gain. Mastercard (NYSE:MA) and Stella Jones [TSX:SJ] (OTC:STLJF) and have very few shares (or in SJ's case none) and just have options on them. What I am pleased to see is not only the cascade of names but also of the percentage of the portfolio allocated to each grouping. These are not hard and fast groups. TELUS (NYSE:TU) could easily have been put in the 'hold forever' category and AltaGas (OTCPK:ATGFF) could easily move into 'foundational'. I put Visa (NYSE:V) into the growth category, as it is certainly a growth stock, but I also consider it a foundational holding, maybe even a 'forever' stock.
My watch list has also been given more attention over the last month, though this year almost all decisions related to purchases have ended up with purchases of more the same companies I already own, averaging into long-term holdings, compared with adding a completely new holding. For example, some of the RSP contributions were allocated to Inter Pipeline [TSX:IPL] (OTCPK:IPPLF) and some to Scotiabank (NYSE:BNS). CCL Industries [TSX:CCL.B] (OTC:CCDBF) is a new addition to the portfolio.
Most of my portfolio activity happens during the early spring, relating to contribution room being available in registered accounts, preparing for tax season, dealing with the new resultant funds, and now, scrutinizing the portfolio to prepare for possible summer instability. It has been a valuable exercise to re-evaluate each holding and where it is situated, and I highly recommend you take a critical spring look at your holdings.
Disclosure: I am/we are long MA, TD, RY, MFC, BNS, PKIUF, BCE, ENB, PDPYF, STLJF, IPPLF, CCDBF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.