Here is the Link; if not directed automatically cut and paste to your web browser.

Cash-rich China on buying spree

Feeling queasy? Time to invest.

Dividend yields are greater than bond yields for the first time in 50 years.

click here to read the article

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

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!

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.

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.

Here are a few basic but important RRSP Reminders for the Season:

- The deadline for contributions to be applied against the 2008 tax year is March 2, 2009.

- The maximum RRSP contribution limit for 2008 is $20,000.

- Clients who reached 71 years of age in 2008 must convert their RRSPs into a retirement income vehicle before the end of 2009 to avoid being taxed at fair market value on their RRSPs.

- Investors can exceed their personal contribution limit by up to $2,000 without being subject to a penalty tax.  (It is very important to be aware of this. If you exceed your allowable RRSP limit by more than the $2,000 allowable overcontribution limit you face a 1% monthly interest penalty. For example, if you overcontribute by $5,000 you face a penalty of $30 per month. This adds up quickly. Check your Notice of Assessment very carefully.)

You will soon receive your Dec 31 statement from the investment companies.  You may experience a Statement Shock!  The numbers are not pretty. Even if you have heard the litany of bad news, it is only when you see your statement that the reality of the steep decline will hit home.

Most will have experience d declines in the 20% to 30% range.  The numbers are bad and painful to look at but not as bad as the markets performance.  In fact, you have likely lost a lot less than the markets.  Why?  Because you also hold some bonds and cash.  Your whole portfolio is not made of 100% equities.  Compare this to the world equity markets:

In the past 13 months, the results were in the range of (see below for details):

Canada -36%
USA -42%
Europe -46%
Asia - 52%

In the short term, uncertainty from economical or political crisis can create sudden drops in value. For example, the average portfolio would have posted a negative return one month after the October 1987 stock-market crash. Over a longer period of time, however, returns were much more attractive, and investors who stayed the course reaped considerable rewards.  Since 1957, the stock market has enjoyed a positive calendar year return in nearly three out of every four years.

Fear and uncertainty might lead investors to sell their investments during tough times, putting downward pressure on prices. I call this self-sabotage.  Trading based on these emotions can be detrimental to a portfolio’s value. By selling during downward price pressures, short-term losses are permanently realized. This is compounded as investors would wait and hesitate to get back into the market, possibly missing some or all of the potential recovery. The lesson here is that patience can pay dividends.

Diversification can also limit losses during turbulent market conditions. One of the main advantages of diversification is reducing risk, not necessarily increasing return, over the long run. A diversified portfolio can help reduce extreme swings in value.

Proper asset allocation will ensure that you have enough cash and bonds for short-term needs and let you ride the ups and downs on the equity component of the portfolio.

If you can’t get over the shock of your investment losses, please do call or make an appointment to review your account and your personal asset allocation.