RRSP Season is Over…Now What?

As many Canadians have become used too, the March 1st deadline is officially come and gone.

The primary question many of our clients are asking us is “What’s the best way to use my available cash flow now that my RRSP is maxed out for the year?” One of the most obvious and natural answers is to take full advantage of the Tax Free Savings Account that the Government “gifted” us on January 1st, 2009.

If you haven’t used up your room entirely (you have contribution room of $5,000 from 2009 and $5,000 for 2010), then we suggest a simple yet effective monthly investment. If you break down the $5,000 available per year, that works out to approximately $416 per month.

The real beauty of the TFSA is the fact that your money is always 100% liquid and accessible at any point, and you never pay taxes on withdrawal, regardless of how much you’ve grown your account.

You’re Take Away: Simply put, you won’t lose if you take whatever cash flow you have available and begin to invest that in a TFSA every month. However, it amazes us how many of us don’t realize that you can invest in stocks, mutual funds, high interest savings accounts and many other investment vehicles much like your RRSP. Depending on your risk profile, time line and realistic expectations, it is highly possible that you should and will want to look at investment choices that have the potential to earn you a larger return then your basic bank is promoting.

After all, if you do happen to hold on to this investment without accessing it for a few years, your growth could be substantial and be withdrawn completely tax free. That, and you can always use your TFSA account to transfer money to your RRSP during next year’s RRSP season if you’re running low on cash at the time.

Until next week, have a wonderful Wednesday!

Chris and Elisseos

Canadian Fund Managers Outperform

Does it really pay to invest in mutual funds? Apparently, it does.

According to a recent report, Canadian Fund Managers outperformed the S&P/TSX in the final quarter of 2008. That is especially important considering it was one of the worst three month periods in market history. Although the difference was small, specifically a -22.71% return for the index versus a -21.67% return for active Managers, the news is still quite positive. In fact, over 50% of active Managers were in this category of “outperformers”, while in previous periods that number was as low as 11.2% to 22.0%.

Your Take-Away: There is no question that you are probably thinking that this news is not overwhelmingly positive considering that the markets still fell quite steeply and that it is the first time in a long time that so many Managers beat the index. I agree.

That said, what I do think is important is that although the majority of Fund Managers may not have beaten the index in the past, there are still many that do. What that says to me is that the Managers you choose to invest with need to be well researched and have some form of proven track record. If in fact you happen to find one of these great Manager’s, you can unquestionably justify that there are times when Mutual Fund’s are worth their price tag.

One great place to start in terms of researching both the fund you are being recommended as well as the Manager who is responsible for it is www.morningstar.ca. I have used that many times myself and I’m confident that you will find this resource quite useful for your own due diligence.

Until next time, have a Wonderful Wednesday!

Chris

The TFSA: Should I Invest in My RRSP or TFSA (Part 4 of 4)

With the recent development of this latest CRA initiative, the biggest question most are asking is “Should I invest in my RRSP or my new TFSA?”. Truth is, that’s a very fair and personal question all at the same time.

It’s personal mainly because of the fact that each person’s situation is very unique and that means that there really is no easy answer or one size fits all solution, except one. That one exception is based on whether or not you contribute the annual maximum towards your RRSP every year, because if so, your new TFSA is by far the next best place to put your additional retirement savings.

If you don’t fall into the small percentage of Canadians who max out their RRSP contributions every year, we need to make a couple of assumptions and look forward to the day you begin to redeem money from either account. In other words, your retirement. Take a look at a couple of the different scenarios below:

Your Take-Away: As I mentioned above, there is definitely no one size fits all answer to the question we are addressing today. My suggestion is that you take an overall look at your entire portfolio, revisit and maybe even redefine your goals, and then decide which account is better for you in your specific situation.

In the end, your best bet is to try and take maximum advantage of both your RRSP and your TFSA. If you’re like most and do not have that luxury, why not invest in your RRSP and then put your tax refund back into your TFSA? Just a thought.

Until next time, have a Wonderful Wednesday!

Chris

The TFSA: Why Does it Make Sense for You (Part 3 of 4)

As I sit here on my couch writing this post, I realize how personal this question really is.

We have discussed what the Tax Free Savings Account (TFSA) actually is and how it works, and now we need to look at why it may in fact make sense for you. The reality is that this type of account can work for just about everyone, but it is essential that you know why you want to take advantage of this new investment vehicle.

That said, there are multiple reasons and ways that you can make this account work for you. In order to keep this post short and to the point, I’ve chosen to try and put some examples together in the form of bullet points. Some of the reasons this could make sense for you could be:

Your Take-Away: By no means is the list above exhaustive in nature. There are multiple reasons for a Canadian to invest in the new TFSA, but it is very difficult to specify which one will make the most sense for you. The only question you need to ask yourself is “do you want to eliminate the taxes you currently pay on your investment growth?” If so, looking at the TFSA is a complete no brainer and something that certainly deserves a small investment of your time.

A couple of more posts to come on the new TFSA, but until then, have a Wonderful Weekend.

Chris

The TFSA: How Does It Work (Part 2 of 4)

As discussed in yesterday’s post, today I will be explaining the basics of how the new TFSA actually works.

According to the official definition as stated by Canada Revenue Agency, the TFSA is “a new way for residents of Canada to set money aside tax free througout their lifetimes.” They go on to say that “contributions are not tax deductible for income tax purposes and the income earned inside the account is tax free, even when it is withdrawn.”

Because there are a number of rules surrounding this amazing new account, I have chosen to use a point form format to better explain what they are: 

Your Take-Away: As I’ve mentioned previously, this is a tremendous new investment vehicle and it is well worth your time to look into this further. Learning how to properly incorporate this new account within the rest of your financial plan appears to be one the largest challenges that most will face, which is why understanding how it works is so essential.

If you would like to read more detailed information about the TFSA and how it works, please see the attached CRA document entitled “The TFSA Explained by CRA“.  

Until next time, have a Terrific Tuesday.

Chris

The TFSA: Introduction (Part 1 of 4)

The Tax Free Savings Account (TFSA) is one of the hottest topics in the Canadian investment world today, and for great reason.

Like everyone else, I believe the TFSA is an incredibly useful savings vehicle for anyone currently living in Canada. In fact, I am exceptionally grateful that the Canadian Government decided to bless an iniative of this nature.

Over the course of the next few days, I plan on providing you with a very simple explanation of what the TFSA is. This is not an overly complicated account or tax vehicle, but it is one that needs to be understood properly in order to take full advantage of its full potential.

Your Take-Away: Because the TFSA is so new to the Canadian market, in fact January of 2009 is the first time that one could open an account, I plan on providing you with an explanation of a number of different questions and topics relating to this new account. Together we will cover the following topics specific to the TFSA:

  1. How does it work?
  2. Why does it make sense for me?
  3. Is it better to invest in my RRSP or my new TFSA?

I am very excited about this series and hope that by the time you are finished reading our posts you will have a much clearer understanding of what this TFSA is really all about and better yet, how you can make it work most effectively for you and your family.

Until next time, have a Magnificent Monday!

Chris

Maybe, Just Maybe, We Have Actually Hit the Bottom

In the article entitled “Is the Tide Turning? Managers Think So”, Mark Noble provides some very interesting reasons as to why many Managers seem to think that 2009 may just in fact be better then previously expected.

According to the Russell Investment Manager Outlook poll for the fourth quarter, “more than 70% of Canadian managers expect positive returns for the S&P/TSX in 2009. Further, 90% of managers surveyed believe the TSX is either fairly valued or undervalued.” In other words, these beliefs are not a direct result of any specific event that has occured in the Canadian market recently, but more because of a belief that the gloom and doom of 2008 and looking into the first half of 2009 has already been “built into” the current pricing of the Canadian index known as the S&P/TSX Composite.

Does this positive news, something we haven’t heard for quite some time, mean that we can expect to recoup our losses from 2008. According to the same poll, that is likely not the case. The article goes on to say “Managers seem to be leaning toward a slow and methodical recovery over the next year. More than 40% of respondents expect the Canadian market to bounce back more than 10% — an impressive comeback — but this is against a backdrop of near 40% losses for 2008.

Your Take-Away: As I mentioned in my last post, you can take just about any quote out of context and generally speaking, even shape it how you want it to sound. That said, this article and poll simply proves to me that it is time to consider getting back into the market or at least sticking with your existing plan. If you have taken a large chunk of your portfolio out of the market and are too afraid to jump back in full force, consider moving back in with smaller amounts spaced over the next couple of weeks and months. If you never did take your money out in the first place, make sure you don’t start now.

No one really knows what the future holds, and I’m certainly not arrogant enough to say that I do. I just can’t help but think that if some of the smartest minds and Money Managers in our Country believe that we most likely will not see much more of a decline in our economy and that we may have actually hit rock bottom, maybe it’s time we start to listen. 

Until next time, have a Terrific Tuesday!

Chris

Ten Pieces of Good News in the Gloom

The following article was first published in Globe Investor Magazine Online on November 28, 2008. Typically I prefer to comment on an article that I post but the author, Dan Richards, does a great job of that. This is one that is definitely worth the read!

Article: Ten Pieces of Good News in the Gloom

By Dan Richards

Few have had as many quotes attributed to them as Winston Churchill. One of his expressions seems especially relevant right now: “Pessimists see problems in every opportunity. Optimists see opportunities in every problem.” These days, there’s certainly no shortage of difficulties to point to – the only saving grace is that the vast majority of these problems appear to be priced into the market.

In fact, a strong case can be made that the pendulum has swung to the point of excess gloom. At a lecture I attended a few years back, a prominent professor of business history commented: “There has always been good news and bad news out there. Only two things vary at any given point in time: First, the balance between good and bad news and second, what people focus on.” The tech mania of 1998 to 2000 was a classic period in which we only focused on the good news and ignored the bad; arguably we’re seeing the opposite take place today as all that people talk about are the negatives, neglecting anything remotely positive. When thinking about all the bad news that faces us, here are 10 “good news stories” to consider:

1. Attractive market valuations
Depending on who you talk to, stock valuations are generally seen to be at either normal historical levels (which should lead to returns in the 8 to 10 per cent range) or at extremely attractive levels, which would result in returns well above that. Of note are recent actions by Prem Watsa of Fairfax Financial, an insurance holding company that made over $2-billion betting against U.S. financials.

Throughout 2008, Fairfax had its equity portfolio fully hedged, eliminating exposure to the stock market – but on November 20, Mr. Watsa announced that they had removed the hedges saying: “While the recession may be long and deep, we also believe that stock prices may have discounted the worst of the economic decline. As value investors, we are finding an incredible number of investment opportunities across the world.”

Another skeptic who has changed his views is Robert Schiller of Yale, who predicted both the tech collapse and U.S. real estate meltdown – and now says that market valuations have returned to normalized levels.

2. The impact of lower oil prices
The dramatic drop in oil prices has put many more dollars in the pockets of businesses and individual consumers. No matter how dire economic prospects might appear, they’d be much worse if oil was still at $150 a barrel (unless of course you happen to be employed in the oil patch – this is a classic example of the same news being positive for some and negative for others.)

3. A return to the old virtues among banks
At one time, banks stood for prudence, risk management, oversight and transparency. It’s clear that too many banks got away from these – and also clear that we’re seeing a return to these traditional virtues that will ultimately leave the banking system stronger.

4. Strong political leadership around the world
The challenges we’re facing today will test the leadership of all of the major economies. The good news is that it’s difficult to remember a time when we had leadership that was stronger and more collaborative and open to new directions than we see today with Gordon Brown, Angela Merkel, Nicolas Sarkozy and Jean-Claude Trichet in Europe; Barack Obama, Ben Bernanke, Tim Geithner, Paul Volcker and Larry Summers in the United States; and Hu Jintao in China and Manmohan Singh in India.

The early response to Mr. Obama’s new administration is especially positive – as he and his team promise to boost confidence among American investors, consumers and businesses , something sorely lacking over the recent period.

The sole exceptions to strong leadership among major powers are Japan, which has suffered from a leadership vacuum since Junichiro Koizumi retired in 2006 and Vladimir Putin in Russia – while there is little question about his strength, his openness to new directions and willingness to collaborate is another question.

5. A co-ordinated global response by central bankers
In the past, difficulties similar to today’s would have led to a fractured and fragmented global response. That’s a sharp contrast to the co-ordinated and co-operative response we’ve seen from central banks and the economic leadership in place today. Indeed, there appears to be a steadfast commitment to do whatever it takes to keep the financial system afloat and to provide the stimulus to get economic growth restarted.

6. Pruning of weak players
The economist Joseph Schumpeter is best known for the concept of “creative destruction”, the dynamic process whereby new ideas supersede old ones and innovation leads to the collapse of traditional market leaders. While it’s intensely painful if you have the misfortune to work for or invest in one of these companies, a key reason that the U.S. dramatically outperformed every other major economy in the 20th century was its flexibility, adaptability and willingness to allow losers to die.

Whether in the automobile industry, retailing or banking, we’ll be better off as consumers and the economic system will be stronger when marginal players are consolidated into stronger survivors – setting the stage for new upstarts to emerge and challenge the remaining incumbents. In countries such as the U.S., France, Germany and the United Kingdom (Canada being a notable exception), an important byproduct of recent events is that weaker banks have disappeared from the scene, with the surviving banks becoming stronger as a result.

7. Opening of economies and growth of entrepreneurial drive
We’ve all heard the expression “You can’t put the genie back in the bottle.” In the past 10 years, we have seen a remarkable outpouring of entrepreneurial spirit and energy in countries with historically closed economies, ranging from China, India and Vietnam to Eastern Europe and South America.

While the current economic downturn represents a setback, there is no disputing the fierce work ethic and drive to succeed that have been unleashed – and while some Western companies and industries will struggle to adapt to the heightened competition that has resulted, it’s indisputable that the global economy will be a big winner as a result. As a side note, not long ago South America and Eastern Europe were seen as economic and political basket cases. In large measure due to the opening of economies and a renewed commitment to democratic government, countries like Argentina, Brazil, the Czech Republic, Poland and Hungary are now poised for strong economic growth.

8. The commitment to global trade
When faced with tough economic periods in the past, one response was to resort to raising trade barriers – this was a key contributor to the Great Depression. The good news is that there have been no signs of a global trade war – and indeed we continue to see movement towards reducing trade barriers (albeit slower than some would like.)

9. The continued payoff from technology
Since the commercialization of the Internet in the mid 1990s, we’ve seen hundreds of billions of dollars invested in the technology that permeates our personal and work lives. While this technology has led to compressed margins and severe pressure on some industries (think travel agents and newspapers, for example), on balance, it’s continued to be a huge driver of increased productivity – and with higher productivity come heightened profits. Another benefit of technology is higher return on research and development - the impact of processing power and instant communication is paying immense dividends in making research dollars more efficient, as information on new discoveries is disseminated in real time.

A shift in focus by the best and brightest
The best talent migrates to those fields offering the most recognition and highest pay. As a result of stratospheric compensation in the financial industry, an entire generation of the best and the brightest young people aspired to be financial engineers. There are already signs that the return to reality on compensation levels is leading to some of that same talent becoming real engineers, where their drive and abilities are going to be put to better use.

“None of this is to say that we don’t continue to have real issues ahead of us and that unwinding some of the excesses of the recent past won’t continue to be painful. Thinking about investment prospects going forward, however, it’s important to bear in mind that we seem to be in that part of the market cycle where the problems seem overwhelming with any offsetting positive ignored … and that it’s exactly these kinds of environments that have historically represented some of the very best times to invest.”

Until next time, have a Terrific Tuesday!

 Chris & Elisseos

Active Managers Beat the Index in Q3

There has been a lot of talk surrounding whether to buy into mutual funds or simply invest in the equivalent index.

Recent data was released by the Standard & Poors Indices Versus Active Funds Scorecard (SPIVA) specific to Quarter 3 results in a down market. This report said that over 60% of active Manager’s beat the S&P/TSX index which is a substantial increase over past results. S&P’s Jasmit Bahndal responded by saying “The important thing for investors to take away is not that there are active managers who can beat the benchmark, but that it’s hard to find them”.

Your Take-Away: Finding a great Money Manager can be tough. Never hesitate to ask your Advisor why he or she recommends that specific Manager and always do your own due diligence to ensure you understand as much as possible about the Manager you may be investing with. Issues such as experience, track record, core philosophy and primary holdings are all key to helping you make the right decision.

This is not a black or white issue at all and many beliefs and theories surround this very controversial topic. My thought is that I’m more then happy to leave the big buying and selling decisions to the people who do this every day, all day, then to try and do it myself. However, that’s just my opinion and it’s up to you to decide for yourself.

Until next time, have a Magnificent Monday!

Chris

Stay Invested…PLEASE!!!

Volatility seems to be a very popular word lately, and with good reason!

Over the course of last week, we saw the Canadian market fall a whopping 16% in only five business days. Those are numbers we haven’t seen for years. Amazingly however, both the Canadian and American markets bounced back quite strong to start off their trading week. The Dow Jones was up over 11% yesterday and the S&P TSX rebounded today by almost 10%. Those are both very substantial one day numbers and present a great learning opportunity for all of us.

Your Take-Away: There is no one, including myself, who enjoys watching their investment portfolio diminish as we’ve all seen over the course of the last few weeks. It becomes very easy to consider selling your investments and moving everything to cash, but after yesterday and today, it becomes very evident that usually that is not the best decision.

Don’t get me wrong, I’m not here to predict whether this is “capitulation”, a “dead cat bounce”, or even the “bottom” for that matter. I am here to say however that if you lost 16% last week and pulled ouf of the market on Friday, you would have missed a 10% or 11% turn around and still been sitting at your “personal market” low. In other words, you would not have been in the market long enough and thus recovered a good portion of your losses.

Riding the wave is not easy, but if you do have a mid to longer term time horizon, it usually works out to be your best bet in the long run. Staying invested and waiting this out will most likely help you to recoup your losses and exceed your highs over time!

Until next time, happy investing…and waiting!

Chris

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