Sunday, November 21, 2010

Can you over diversify your portfolio?

Every investment expert will tell you the same thing: Be sure to diversify your investments. And really, it’s just plain common sense – limit the type of investments you make and they’re easily squished by a single bad market cycle; but diversify your investments among all asset classes – cash, stocks, bonds, mutual funds and fixed-income investments -- and your chances for loss are radically reduced while your opportunities for long term growth are vastly enhanced.
But is it possible to add too many investments to your portfolio so that you actually begin subtracting from portfolio performance instead of adding to it? The essential answer is ‘absolutely’ – which is why the key is to understand the objective of diversification and how it applies to your portfolio.
The basic purpose of diversification is to control risk. The market goes up and down; it always has and always will. But making emotional buy and sell decisions in response to dramatic market moves is one of the biggest threats to the well-being of any investor’s portfolio. The solution is two-fold: diversify to cushion your portfolio from regular market ‘spikes’ and ‘corrections’ and stay the course to flatten out inevitable market fluctuations.
By combining investments with different return patterns, you reduce the variability of the portfolio as a whole. Look for investments that perform well at different times – that way, some parts will produce above average returns while other parts may be producing below average returns … but the combination of all parts will create a portfolio with relatively less risk overall.
But be sure you are really diversifying. As long as you add elements to your portfolio that are truly different, you are diversifying and there is a benefit to your portfolio. The real risk is adding things that are not diverse – such as adding another petro stock to your existing array of petro stocks, which has no risk-minimizing benefit.
Diversification is more important than the number of investments you hold. The return on your portfolio is simply the weighted average return of each part of your portfolio taken together. Ten mutual funds returning 8 per cent will deliver a portfolio return of 8 per cent – exactly the same as if you held five of those funds … or one. The key is how consistent will that 8% return be over time. A diversified approach smoothes out the bumps caused by market volatility ensuring a more consistent return over time.
The bottom line is this: portfolio performance is dictated by investment choice … not investment quantity. Talk to your professional advisor about designing and constructing a well-balanced, effectively diversified investment portfolio that will meet your financial objectives and match your risk comfort level and time horizons.

Tuesday, November 9, 2010

Tax-free savings account a mystery to many

The CBC reported today that "While more than one-third of Canadians have opened a tax-free savings account, a survey by Leger Marketing found nearly 40 per cent don't know about investment options within a TFSA."

While the TFSA (Tax-Free Savings Account) may be the best thing since the RRSP (Registered Retirement Savings Plan), the fact that they are so widely misunderstood means that many people who have opened a TFSA may not be getting the most out of it.

As with any investment, it is important to ask the right questions before you take action. A good advisor can help make sure that you're getting the most 'bang for your buck'.

Let me know what you think ... Do you understand the rules governing TFSAs?

Source: Finance

Wednesday, November 3, 2010

It is basic – an RRSP is good for you

When it comes to investing and saving on taxes, you have options. Within your financial planning process, you should look at all of them and select those that work best for your unique situation. But there is one investment option that’s a no-brainer. The Registered Retirement Savings Plan (RRSP), since being introduced 53 years ago, has become the basic foundation of almost every financial plan. RRSPs have stood the test of time as the best tax-saving, income building vehicle for most Canadians.

Here are the keys to making the most of your RRSP opportunity.
  • Contribute to the max Always make your maximum allowable contribution each taxation year to get the most in immediate tax savings and to maximize the potential long-term growth of your RRSP investments. You’ve still got some time to contribute for 2009 – the deadline is March 1, 2010 – and you’ll find your maximum allowable contribution room on the Notice of Assessment sent to you from the Canada Revenue Agency (CRA) after filing last year’s income taxes.
  • Contribute regularly Making automatic monthly contributions to your RRSP is much more rewarding than contributing a lump sum once a year. Here’s how: By investing $250 regularly each month at a compound rate of return of 8%, you’ll have $372,590 in your retirement nest egg 30 years from now.* But if you wait until the end of each year to invest a $3,000 lump sum, you’ll have only $339,850. By investing monthly, you’ve added $32,740 at retirement without contributing a dollar more.
  • Play catch (up) If you have unused contribution room, fill it up as soon as possible for additional tax savings and longer-term tax-deferred, compound growth. You can fill your unused contribution room in a single year or over a number of years until you reach age 71.
  • Borrow to save An RRSP loan can be a smart way to maximize this year’s contribution or to play catch up on your past contributions – but you must get the loan at a low interest rate and pay it back as quickly as possible. A best practice: Use your RRSP tax savings to pay off the loan.
  • Spousal savings A higher-earning spouse can contribute to an RRSP for the benefit of his or her partner and enjoy a tax reduction on the contributions.
There are other RRSP strategies that can work for you – the right ones, incorporated into your overall financial plan, will help you save on taxes every year, retire with more and enhance your estate. Talk to your professional advisor about what’s best for you.

* The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to indicate future returns on investment.