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Monthly Archives: February 2009

Terry Broaders
Odette Morin
Terry Broaders

Canada !! More Than Just Hockey, Moose and Mounties !!

In the February 16, 2009 issue of Newsweek Magazine Canada received some high praise indeed from journalist Fareed Zakaria. He extols the virtues of our government’s prudent financial management and our sound banking and financial systems.  Seems that after all, Canada is more than just hockey, moose and mounties. Not that there is anything wrong with those, mind you!! 

Here is the link to the Newsweek Article:

http://www.newsweek.com/id/183670

Terry Broaders

The Penalty For Not Staying Invested

In an environment of negative economic news it may be tempting to invest in cash or GICs until “things calm down” and there are signals that it is “safe” to go back into the market. A graph from the Investment Funds Institute of Canada shows that as the value of the TSX rises, the amounts invested in money markets or cash falls and as the TSX falls the amounts invested in cash rises.  The TSX market bottom almost exactly matches the height of investment in money market funds.  In other words we are tempted to buy when we feel good and sell when we feel bad which is the same as buying high and selling low. 

Another point to consider is that if we go to cash we generally miss most of the recovery because we sit on the sidelines too long before re-entering the market. If you were to have invested in the TSX from January 1, 1976 to December 31, 2007 you would have earned an annualized return of 8.8% excluding dividends. If you had missed the 30 best days during this period of 11,688 days your annualized return would have fallen to 4.8%. According to a study by Nobel prize winner William Sharpe you would have to be right 70% of the time as a market timer to do as well as a buy and hold investor.

Once a correction or a recession begins we simply don’t know where the bottom will be or how long the correction will last.  We do know that investors who stay invested benefit from 100% of the recovery!

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Odette Morin

Best buying opportunities in years, makes it the best timing for your RRSP contribution

It is currently no doubt a trying time for anyone paying attention to market fluctuations. You may still be shocked by the drop in portfolio values you saw on your recent statement.

Please remember this: Even though this time is difficult, your plan is built to last through market corrections like this and if you are in your saving years, situations like this are actually an excellent opportunity for the future.

Let me explain: When markets are riding high, each dollar you invest buys fewer mutual fund units or company shares, because each unit costs more. When the market falls, it takes unit prices with it.

Compared to last year, shares are cheap, making this an excellent opportunity to buy and invest for your future. Those of you who invest automatically every month are already taking advantage of this opportunity: Dollar cost averaging is a strategy that allows us to acquire more shares while prices are low. It also means that we invest when prices are high, but the regular habit o f automatic deduction guarantees that we don’t miss buying opportunities like this one.

Whether you’d like to make a year-end contribution to your RRSP or even use some leverage to invest, the conditions today are good.  We may look back in a year or two and realized how low and affordable equities around the world were. 

It is especially important to see the big picture in time s like these and seized the opportunity.  Buying low will speed up the recovery process.  The timing of this year’s RRSP could not be better.

Of course, your contribution needs to be considered within the context of your overall financial plan. If you were uncertain of whether you should make an extra RRSP this year, be contrarian, see the big picture and the long term opportunities.  Here is a historical graph of the Dow Jones Industrial Average from 1900 to now.

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Odette Morin

Should you consider an RRSP loan this year?

Should you consider an RRSP loan this year?  Or if you have lots of accumulated RRSP deduction limit should you consider an RRSP “Catch-up loan” instead of making monthly contributions?

You could give a big boost to your retirement plan by using other people’s money via an RRSP loan while getting help from the government with a big refund.  It is ok to borrow in this case because you are doing so to acquire an asset.  This would be considered a “good debt”. This is a widely used strategy nowadays also because it is currently somewhat inexpensive to borrow. It makes even more sense to borrow to invest when it is an RRSP. The extra advantage comes from the tax savings (or refund if enough was withheld at source). If you have a high interest debt, using the refund to pay off that debt would make this strategy even better.

A major concern is to ensure that you will feel comfortable with the payments for the duration of the term. 

Here is how it works:

Let’s assume that you have RRSP deduction limit of $20,000 and you earn more than $50,000.  You could maximize this room by doing an RRSP catch-up loan.  You will save anywhere from 20% to 43% of your RRSP contribution or in this case about $6,000 in taxes!  The refund depends of how much tax was withheld at source of course.

If you want to pay it off in lets say, 5 or 10 years, the monthly payments would approximately be $390 for a 5 year loan and $240 for a 10 year loan. If you apply the refund to the loan, it would be paid off earlier of course. You can pay the loan down or off entirely anytime without penalties.

If you are currently making monthly RRSP contributions you may want to stop or reduce them.  I suggest that you first recalculate your retirement plan including this catch up contribution and make the ongoing contributions required to be on track with your retirement savings objective.

To summarize, using someone’s money make financial sense to give a boost to retirement savings, increase your net worth faster and reduce taxes!  If you have a higher interest rate debt, this strategy is even better for you!

Investment loans are not for everyone and you should understand the risks prior to committing to this strategy.  Ask us if this makes sense for you!

***Important Compliance Disclaimer***

An investor proposing to borrow for the purchase of securities should be aware that a purchase with borrowed monies involves greater risk than a purchase using cash resources only.  The extent of that risk is a determination to be made by each purchaser and will vary depending on the circumstances of the purchaser and the securities purchased.

Discuss the risks associated with leveraged mutual fund purchased with an investment funds advisor before investing.  Purchases are subject to suitability requirements.  Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only.  If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same if the value of the securities purchased declines.