|A positive year
Monday, December 06, 2010
I have recently noted quite a few positive events occurring
in the investment world, and as most news is focused on the
negative, I thought I’d bring these items to your attention.
The credit crisis pushed the Western financial system to the
brink. The S&P/TSX had dropped to 8,123 by February 2009,
from a previous high of 14,714 in May 2008. The S&P/TSX
was recently back to over 13,000, a 60% increase over February
So the world didn’t end, and those who had the courage to invest
lump sums or maintain monthly plans were rewarded (as they always
have been in the past). Investing is not a 100-metre dash. It’s
a marathon, with some tough stretches, where we wonder at times
“why we did this, again?”
We do it, because as much as we don’t like too much volatility,
it can help reach our financial goals when we buy more units
while prices are on sale. Getting 1% to 2% a year from GICs
won’t get us there, that’s for sure, although the ride is less
People were fearful after a terrible 2008 and a mediocre decade
overall. The problem is that the fear protects you in the short
term, but hurts all your long-term planning. Staying on the
sidelines would have cost you almost 60% since the market lows.
That’s not a good strategy. As James Melcher once said,” The
stock market is like a nervous horse. If nothing spooks it,
you’ll have a jumpy ride. But you’ll get where you are going.”
The Canadian dollar is once again near parity with the U.S.
dollar, buoyed by increased gold and oil prices. The loonie
is highly influenced by oil and gold, much as Australia’s dollar
is affected by its resource base. Our dollar near parity has
some obvious advantages in terms of travel, cross border shopping,
and increased purchasing power on certain items.
The U.S. government has recently put in place some fiscal policies
designed to help decrease the value of the greenback. Its main
policy is something called “quantitative easing,” a process
used by the U.S. central bank – the Federal Reserve Board --
which is simply a technical term for putting more money into
the system so people will borrow and spend more and thus spur
the economy on. There are some inflationary worries in the longer
term with this policy. The U.S. consumer and government are
too much in debt and until that changes, the situation in the
U.S. will not substantially improve.
Recent studies have shown that most Canadians don’t realize
they can hold mutual funds in a Tax-Free Savings Account (TFSA).
And most aren’t aware that they can hold exchange-traded funds
(ETFs) in a TFSA. ETFs are simply a basket of stocks that track
a specific index. ETFs therefore have cheaper ongoing costs
than mutual funds, because there is no active portfolio management
involved in in choosing and maintaining the portfolio.
When it comes to TFSAs, too many people hear the “savings account”
part and simply put their TFSA investment in a bank/credit union
savings account earning next to nothing. The point of the TFSA
is to grow capital and not pay any taxes on redemption. Growing
$10,000 to $18,000 and cashing out would normally mean you’d
have to take 50% of your capital gains into income to be taxed
at your marginal rate. In a TFSA; you can cash out $18,000 and
pay no tax at all.
To earn $80 in interest income taxed at 30% means that you
only saved about $25 by having a TFSA. Of course there is nothing
wrong with saving $25, and if you may require the money within
one to two years, that may be your best option. If however,
you have a longer time horizon and can assume some volatility
(ups and downs), there are many better options available to
you. Some of these options are even fully guaranteed (such as
IA Clarington’s Target Click).
In conclusion, it’s been a pretty good year thus far, and we
should all receive positive news in mid-January when the December
31, 2010 statements usually arrive.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.