Friday, December 31, 2010

Yes! -- tax efficient investing still matters

It’s easy to be short-sighted in these uncertain economic times. Each day, you scan the business section of your newspaper or look online for concrete signs that the recession is receding. And even though the market now seems to be having more good days than bad, it still has some climbing to do. Which means that investment returns and interest rates continue to lag – and that makes it too easy to take a narrow focus on the short term and lose sight of your overall financial objectives.

It’s important to hold fast to the fundamental rules for a successful financial plan because they are proven principles for weathering any economic storm. Among the most important are:
  • Smooth out market cycles by staying invested for the long term.
  • Diversify your investments using effective asset allocation techniques.
  • Select investments that match your appetite for risk and take maximum advantage of the ‘miracle of compounding’.
  • And practice tax-efficient investing – an investing rule that assumes even more importance when returns and interest rates are low.
That’s why you should …
  • Make the most of your Registered Retirement Savings Plan (RRSP). Your RRSP is an exceptional tax-saving, nest-egg building investment – and you’ll get a maximum tax reduction by making your maximum RRSP contribution each year. Fill up unused past contribution room for even bigger tax savings this year and a much larger nest-egg over time.
  • Reduce taxes generated by your non-registered investments by selecting investments that benefit from lower tax rates – for example, investments that generate capital gains or dividends eligible for the enhanced dividend tax credit.
  • Make an annual $5,000 contribution to a Tax Free Savings Account (TFSA). Your contribution isn’t tax deductible but money and interest inside a TFSA is tax-free and so are withdrawals, which can be made at any time for any purpose.
  • Make the most of your spouse. Look into income-splitting with your spouse, having the higher-earning spouse contribute to a spousal RRSP, and/or having the spouse with a higher marginal tax rate make a prescribed rate loan to the other spouse in a lower tax bracket. When used correctly these ‘spousal options’ can effectively reduce a family’s taxes.
There may be other tax-reducing strategies that will work for you. A truly effective tax plan must be an integral part of your overall financial plan, investment program and life goals. Your professional advisor can help you put it all together in the best possible way for your unique situation.

Monday, December 13, 2010

Critical Illness insurance – why you need it

Critical Illness insurance – you need it not because you are going to die, but because you are going to live … and because you may have illness-related expenses that you may not have considered.

While you might be surprised at the growing number of Canadians who are being diagnosed with a critical illness at an increasingly early age, the good news is that medical advances are increasing life expectancy and there are much brighter prospects for surviving. Check out these statistics:
  • 70,000 Canadians suffer a heart attack each year and 1 out of 2 heart attack victims is under age 65 – but 95% survive their first attack*
  • 1 in 3 Canadians will develop some form of cancer – but 65% will survive at least five years*
  • After age 55, the risk of stroke doubles every 10 years and 1 out of 20 Canadians suffers a stroke before age 70 – but 75% will survive it*
  • Women have a 1 in 9 chance of developing breast cancer – but only a 1 in 27 chance of dying from it.**
  • Men have a 1 in 7 chance of developing prostate cancer – but only a 1 in 26 chance of dying from it**

You might expect that provincial or employee health plans will pay for all the expenses associated with critical illnesses like these but many are not covered.

The benefits of critical illness insurance are most important during the first few months after diagnosis when emotions and costs are typically at their most intense. With this type of insurance, you receive a lump sum cash payment, after a 30 day waiting period after diagnosis for any life-threatening illness covered by the policy, usually including the most common such as cancer, heart attack and stroke. The benefit is tax free under current tax legislation and yours to use any way you wish -- perhaps to pay for expenses not covered by provincial and health plans like these:
  • Many drugs or other medical expenses
  • Private treatment, a nurse, child care provider or housekeeper
  • Medical treatment outside Canada or in another province
  • Medical equipment – a wheelchair, scooter or home care bed
  • Retrofitting your home or vehicle to accommodate a wheelchair or chairlift
  • Pay off your mortgage, car loan, credit cards, lines of credit or business loans
  • Avoid dipping into your RRSP or your child’s RESP
You want to be able to focus on recovery not costs – and critical illness insurance can help you do that at a most critical time. Your professional advisor can show you how critical illness insurance can complement your other forms of insurance protection and fit into your overall financial plan.

*Disability Insurance and Other Living Benefits, CCH
**Canadian Cancer Society, 2006

Thursday, December 2, 2010

Emotional investing – the road to ruin

It’s a fact: Emotional investing doesn’t pay, it costs. Market study after market study has clearly proved that when investors are driven by emotions – jumping into and out of stocks looking for the next winner, pouring money into mutual funds following a period of strong market growth, and then moving to the next ‘hot’ asset class during market troughs – they often lose, and sometimes lose big.

Here’s an example: In 1999, the Canadian equities market jumped a spectacular 31.7 per cent, prompting a lot of investors to hop on board in the year 2000. Over the next two years, the market went negative, declining by over 12% in each of those two years and many of those ‘heat seeking’ investors bailed out. So, not only did they miss the big jump of 1999, they also absorbed large losses when they cashed out. However, had those investors stayed invested for the entire 1999-2007 period they would have enjoyed overall returns of close to 30 per cent.*

And that brings us to one of the prime rules for investing success: Trying to time the market or a stock almost never works. But time in the market does by delivering better overall returns – especially when you couple your long-term stay the course strategy with:

  • Effective asset allocation Markets are always volatile to some degree or another – it’s in their nature – but with a carefully selected and properly diversified ‘mix’ of assets, you can effectively reduce risk, and enhance your chances of achieving your long-term goals.

  • Dollar cost averaging This is the strategy of buying a stock or fund on a regular basis, at an amount you can afford, regardless of the stock or fund price. It is a systematic buying approach that saves you from trying to time the market, averages out the price of your stock or mutual fund units, and ensures you are always participating in the market so you will never miss out on periods of excellent returns.
When you invest with reason instead of emotion and wrap other effective strategies around the ones introduced here – such as investing according to your tolerance for risk, achieving instant diversification through a portfolio mutual fund, and dollar cost averaging to eliminate any concerns you may have as to when the right time to invest is – you will be well on the road to financial success, regardless of short-term market or economic downturns. Your professional advisor can make sure your investing strategies are right for your personal needs, expectations and goals.

*Source: Investor Economics as cited in Managing Emotions When Investing, Investors Group Inc. 2008