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Monthly Archives: March 2009

Odette Morin

Confusion about Book Value and Net Invested on the Online FundEX statements

If you check your account using our online service, you will notice that there are two figures.  The Market Value and the Book Value.  The market value is the current value of your account using the previous business day market close.  It is the book value that is raising a lot of questions.

The confusion comes from the misunderstanding between Book Value and Net Invested.  The Book Value figure that you will see on the Online FundEX statement is NOT your Net Invested.  This figure includes distributions i.e. interest and dividends earned by the fund.  Also, if you make a switch from one fund to another, the book value of the new fund will show, it does not carry over the old book value.  The book value of each fund is calculated for tax purposes.  But even for that, it is not totally accurate.  It can also go down in value when we switch from one fund to another and / or a different company.  So, the book value is not that relevant to most people.

The net invested is shown on each fund company statement and by us. YOU FIRST, unlike many advisors, tracks all money in and money out and reports it on your annual review statement in one consolidated statement.  That is the report we give you at your annual meeting.

If you need your book value for tax purposes, we can get it for you from the fund company.  We also use this figure extensively for your year-end tax planning review if you have a non-registered account.

To summarize, only the fund company net invested and ours is relevant and accurate.  Please be sure to come for your annual review or set up a telephone meeting.  The report is produced by our staff only once a year as it takes a few days for them to prepare it. 

In looking at your account online, please be sure to remember that the book value is NOT your net invested.

Terry Broaders

Home Renovation Tax Credit

Ok, so what’s this Federal Government Home Renovation Tax Credit all about anyway?

Let’s begin by reviewing what is NOT eligible!  New appliances such as big screen TV’s, refrigerators, furniture, throw rugs, appliances, electronics, stereos and tools such as electric saws, drills et cetera are NOT eligible.  Also, routine maintenance repairs such as small paint jobs, cleaning the gutters, power washings are not covered.

Well what is eligible?

Essentially, repairs of a major or permanent nature would be eligible. These would include major structural renovations, new carpeting, major interior or exterior painting, new deck, new floors, new windows, new doors, major landscaping, new furnace, new roof, new plumbing or bathroom fixtures, et cetera would be eligible items.  Also, the expenditures have to be for your personal property. So your home, cottage or Canadian vacation property would qualify. Renovations for a rental or investment condominium or renovations to a basement apartment that you are renting out are not eligible for the credit. Renovations have to be done between January 27, 2009 and January 31, 2010. Remember that there is just one allowable claim per family.

How much is the credit worth?

The credit is 15% of renovation expenses between $1,000 and $10,000. If you spend $1,000 then you get zero. Between $1,000 to $10,000 you get 15% or $1,350.  So if your total cost was $15,000 you would get the maximum credit of $1,350. If your total cost was $7,000 you would get a credit of $900.

How exactly do I get the credit? Does the Canadian government send me a cheque?

You will claim the credit when you file your 2009 income tax in the spring of 2010.  Let’s say you spent $7,000 and therefore your credit is $900. On your 2009 tax return the income tax that you would otherwise owe will reduce by $900. So essentially, if you are due a refund then your refund will increase by $900. If you owe taxes then your tax bill will reduce by $900. If you have a modest income for 2009 (under $10,000) you would not enjoy the credit because you would not owe any tax anyway. You do not have to send receipts in with your tax return but you must be able to provide them should Canada Revenue request them as part of their routine review request.

How can I get more information?

Canada Revenue has an explanatory website feature at this address below.

http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhmrnvtn-eng.html#q6

Odette Morin

Client’s Top Questions these days

The market events of the past few weeks surprised us all just as much as the gut wrenching descent last fall.  Where is the bottom?  Have we seen the worst or are we exposed to more drops?  Should we sell now until it settles a bit?  Should we do something differently?  What is the best strategy at this point?  These are questions we all have on our minds. 

Here are the top questions we have received from clients these days and with our response as well as potential solutions.  Please take the time to read them.  This should offer some relevant insight and perspective on the current situation.

My account is down.  How bad is it?

Let’s see how bad things are out there?  The year 2008 was bad and 2009 has stumbled so far.  If we look at the world’s major stock markets for the 14 month period from January 1, 2008 to March 9 we see the following; TSX (Canada) -45.3%; Dow Jones (U.S.) -51.1%; S&P500 (U.S.) -54.3%; Hang Seng (Hong Kong) -58.6%; DAX (Germany) -54.2%.  Even Warren Buffett, usually the world’s richest man and often acknowledged as the world’s greatest investor, saw the value of his Berkshire Hathaway company drop -48.3% !

When we look at our client’s portfolios we see that the losses for the same 14-month period are typically in the range of -23% to -33%.  Clearly a drop of 23% to 33% is not a cause for joy but it is certainly much better than a 50% drop or worse.  Diversification and asset mix has indeed softened the market plunge.

Am I going to lose more? 

That is the million-dollar question.  No one knows where the bottom is at this point.  Some analysts say that we have seen the worst and other say that it will get worse before it gets better again.  We are back to 1997 inflation-adjusted levels. That is 12 years of gains knocked back. 

We are 15 months into the recession now and recessions usually last 10 months.  While it is true that this is not a usual recession, we know that the recessions of the 70s and 90s, were very unusual as well.  Though it may feel this way, right now is not the worst times ever!  The 1991 recession brought stock values back 26 years after adjusting for inflation.  The 1974 recession after adjusting for inflation brought stock market values back to 1906. That was 68 years of gains lost!! But as we all know now, we did recover.  So, as unusual as this may seem now, this is not the first time that we experience drastic stock declines and many say that it was a lot worst back then.  See below for an article on the subject of the 70s and 80s recession.

Yes but will it continue to decline in value? 

The short answer is “We don’t know”.  There may well be further declines. There is not a lot of rational in the market movements these days.  It is largely based on emotion, not facts.  Valuations don’t matter, financial statements don’t matter, and analyses don’t matter.  There will be no newspaper headlines stating: “The bottom has been reached! Now is the time to buy”.  Only when we get to the future and look back will we know where the market bottom was. 

Why don’t we just sell and buy back later when settle down?

If it were that easy, we would have sold in late 2007, sat still for a year and a half and would be buying now.  It is easy to see in retrospect. We knew then that a recession was likely to be triggered in the US due to the sub-prime mortgages excesses but we never anticipated the speed and depth of the decline.  Selling is the easy part, knowing when to buy back is the near impossible to right part.

We can’t bail out now simply because markets can move very erratically.  In fact, it is well known that if you miss the best few days of a recovery, you miss the whole rally.

If we sell now, and wait to buy back, the chances of missing these best few days is very high and that is why we do not time the market ever even if we do suspect that the markets are suffering from a pending recession.  We know markets will recover, but we are not sure of when and how long it will take.

It is simply safer to stay the course, ride it out and wait for the come back.  The come back always happens sooner or later simply because companies continue to grow revenues and profits.

I know all of this, tell me something different?

Yes we know all of this but yet, emotionally it is difficult to believe that markets will turn around this time as well.  The only thing different we can say now is that if this type of fluctuation make you nervous, there are options which offers guarantees and it is essential that you know your options. One option is to use Segregated Funds which can guarantee your return of principle ten years from now or upon death while still benefiting from potential market growth.  Some segregated funds even offer a 5% guaranteed annual payout.  Ask us if you want to know more.



Can we just change a few things around?

The best advice that we can give right now is what we have said already.  If you start drastically changing things around or completing revising your personal investment strategy, that is when we make errors. Changing things would usually mean moving from your current depressed holdings which right now have the likeliest and greatest potential for growth and moving them to lower return investments which while adding stability now offer a lesser potential for growth as the markets recover.  It is best to follow only an annual review rebalancing process.

How long is it going to take to come back?

Counting dividends you may be surprised how quickly things will recover from their current depths.  Many analysts, economists, central bank governors, governments and pundits seem to feel we will experience recovery in late 2009 and through 2010. Again, nobody knows but if most of us “expect or feel the recovery will occur in late 2009 to 2010” then that is probably when things will start to recover.

Conclusion

At the end of the day, what matters is “are you on track with your objectives”.  If the retirement cash flow plan works then the returns are not that crucial in the short-term.  If you are in a younger age bracket and in your prime savings years then you now have the opportunity to invest at levels not seen in many years. You truly do have the opportunity to “buy low”.  At the end of the day we don’t think that it is possible to “sugar-coat” things and say that what is happening now is just fine because it is not. The current financial crisis is the worst that we have seen in our life times but this does not mean “that this time is different” and that we will never recover. The markets have recovered from all past crises and will recover from this one.

Please never hesitate to call us directly. We will be happy to speak with you regarding your account. Thank you for your continuing support in these challenging times. We value your trust very much.

Some articles you should read (you can cut and paste if the links do not work automatically)

Irrational Pessimism Has Taken Over Our National Broadcaster

Why This Recession Seems Worse Than 70’s and 80’s

Everything Will Be All Right, Warren Buffett

Timing the market