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In this brief post I disclose minor changes to investment holdings after publishing my 2023 Year End FFJ Portfolio Review. The changes were made as part of our Registered Retirement Savings Plan (RRSP) meltdown strategy. I do not disclose details surrounding our investment holdings in registered accounts, and therefore, make no mention of how many shares were involved in recent sales transactions.
Secondly, two young investors I am helping on their journey to financial freedom recently acquired shares in high quality growth companies.
Registered Retirement Savings Plans (RRSP) Meltdown Strategy
I recommend a couple of videos to learn more about this strategy.
NOTE: I have no affiliation with the parties presenting these explanations.
One of the meltdown strategies presented encompasses the use of debt. I am not a proponent of this strategy.
The RRSP meltdown strategy is relevant if you have a sizable RRSP. Every investor's circumstances, however, are unique so it is extremely important to get sound financial (including tax) advice.
Furthermore, this strategy is executed over a period of several years. If you have very few years before the mandatory conversion of a RRSP to a Registered Retirement Income Fund (RRIF), this strategy likely will not work as intended.
After reviewing our situation with tax accountants a few years ago, we embarked on a strategy of gradually withdrawing funds from our RRSPs. These withdrawals trigger a tax liability but are structured to avoid being in the highest tax bracket.
The value of our RRSPs are such that if we do not start withdrawing funds from these plans, we will find ourselves in the predicament where our mandatory minimum annual RRIF withdrawals will place us in the highest income tax bracket. Add income from investments held in non-registered accounts to our registered retirement account withdrawals, and my wife and I will have taxable annual income taxed at the highest tax level.
To make matters worse, we intend to start collecting our Canada Pension Plan when we respectively reach age 70. In essence, more income taxed at the highest level unless we employ the RRSP meltdown strategy.
Furthermore, our Old Age Security (OAS) payments from the Canadian Federal government would be ENTIRELY clawed back if we are in the highest tax bracket.
Sales from Retirement Accounts
On January 4, I executed the following sales. None of these holdings were within our top 30 holdings.
In hindsight, I would have been wise to exit these positions and to redeploy the sale proceeds into other companies where I could have generated far superior returns.
United Parcel Services (UPS)
The earliest records I have on file are from 2006 and UPS appears on these records. I have, therefore, held UPS shares for at least 17 years.
The average annual rate of return with the reinvestment of dividends is less than 8%. I could have done much better than this!
Coca-Cola (KO)
I initiated a KO position on January 9, 2014 and acquired additional shares in July and October 2014.
The average annual rate of return with the reinvestment of dividends is less than 8%. I could have done much better than this!
FYI - KO is 'dead money'. AVOID!
Bank of New York Mellon Corp (BK)
I initiated a BK position on December 30, 2010 and acquired additional shares in September 2011.
The average annual rate of return with the reinvestment of dividends is less than 8%. I could have done much better than this!
FYI - BK is 'dead money'. AVOID!
Ecolab (ECL)
Unfortunately, I had to liquidate the ECL shares held in a particular account because there was nothing else I wanted to exit. I only initiated this relatively small position on March 9, 2020.
Sale From A 'Core' Account In The FFJ Portfolio
SmartCentres Real Estate Investment Trust (SRU-UN.TO)
I am not a strong supporter of real estate investment trusts. The only reason I invested a very small amount in this REIT is because I was familiar with the Chief Financial Officer who joined SRU-UN.TO from Allied Properties Real Estate Investment Trust (AP-UN.TO); I invested in SRU-UN.to when it was known as Calloway REIT.
This was my only exposure to REITs. I intended to exit this position some time ago but procrastinated. On January 5, I finally exited this position.
FYI - SRU-UN.TO is 'dead money'. AVOID!
Purchases
The following purchases were made by a couple of young investors.
Heico (HEI-a), Copart (CPRT), Zoom Video (ZM)
I have analyzed these companies in previous posts that are accessible here.
Both investors have very long investment time horizons, and therefore, investing in high quality growth companies is preferable.
In my December 19, 2023 HEICO post I wrote:
In FY2023, Canada introduced the First Home Savings Account. These young investors can each contribute $8000 and receive a tax deduction. Do this in 2023 and 2024 and that is a combined $32,000!
Canada also has a Tax Free Savings Account. In 2023, the maximum contribution limit is $6500 and this rises to $7000 in 2024. Contributions to this account are not tax deductible, however, all investments in the TFSA grow tax-free. Maximize the 2023 and 2024 contributions and that is a combined $27,000!
That is a total of $59,000 before:
- any potential appreciation in the value of the investments; and
- BEFORE each investor maximizes their Registered Retirement Savings Plan contributions!
Repeat this process annually and these young investors may be able to 'escape the rat race' at a young age.
So...
On January 8 and 9, shares in these 3 companies were acquired in different self-directed accounts registered in their respective name.
I have no idea how shares in these companies will perform in the short-term. I, however, am reasonably confident shares will be far more valuable several years into the future.
Within the next few days, my HEICO guest post will be published at Dividend Power. My Final Thoughts in that post include the following:
HEI's track record of a high level of discipline leads me to think it will continue to create wealth for long term shareholders.
If dividend metrics are key in your decision making process, HEI may not appeal to you. Dividend metrics, however, are of little importance to me. I focus on quality, risk, and a company's total potential long term investment return.
One of the young investors I am helping on their journey to financial freedom acquired HEI.a shares on January 8 in a Tax Free Savings Account (TFSA). While this investor will incur a 15% dividend withholding tax on all dividends distributed, the dividend component of the HEI.a investment is immaterial.
HEI.a's Average Annual Total Return (AATR) over the past 10 years slightly exceeds 20%. I know historical performance does not predict future performance but I am reasonably confident this HEI.a investment should be able to generate at least a 15% AATR; the company's strategy is controlled growth with a focus on 15% - 20% bottom line growth.
Applying the Rule of 72, this HEI.a investment should be able to double in value in just under 5 years.
NOTE: The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. Alternatively, it can compute the annual rate of compounded return from an investment, given how many years it will take to double the investment.
Should the AATR fall short of the company's minimum 15% bottom line growth and come in a 10%, the investment should theoretically double in value in ~7.2 years.
This young investor should not need to access any investment within their TFSA during their lifetime. If we err on the side of caution, however, and assume this young investor will access this investment in ~50 years, this investment should have had enough time to significantly appreciate in value.
Final Thoughts
That's it for now.
Fingers crossed for a nice broad market correction.
I wish you much success on your journey to financial freedom.
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you to make all investment decisions through research and due diligence. You should also consult your financial advisor where appropriate.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
