Different Makes a Difference

A McDonald’s in Tampa, Florida, struggling to find labour, is offering job applicants $50 just to show up for an interview. Homebuilders have seen lumber prices shoot higher. Groceries are getting more expensive. The U.S. Consumer Price Index, a broad measure of consumer prices, rose 5% in May, its highest rate of increase since 2008. In Canada, consumer prices are rising at their fastest pace in nearly a decade. Tangible examples of inflation abound. What’s less evident is whether current inflationary forces are transitory or if they will prove to be more problematic.

Taxes are inevitable, and long-term investors often face the reality of paying capital gains taxes when they sell stocks in their non-registered investment accounts. When this occurs, investors are left with less money to reinvest and compound over time. To offset this impact, investors want the return from whatever new stock they buy to be higher than the stock they sell. Interestingly, the theoretical break-even return required from a new stock to justify a switch may not be as high as some think. This can be illustrated through an example.