Managed Money Reporter Newsletter — Issue 168, February 2001

Editors: Carl Spiess & Allan McGlade

Featured Articles

Finding Calm in the Eye of the Storm

For anyone who is following or is invested in the financial markets, it is evident that the volatility in the market has been and continues to be unprecedented.

As the pace of change continues to accelerate, it should come as no surprise that capital markets would reflect this. Interestingly, in 1970, Alvin Toffler wrote a book entitled Future Shock, which suggested that the harrowing acceleration of technological change in our world today is creating tremendous opportunities and enhancements to peoples lives, it is also leaving even the experts in the investment community scrambling to understand its implications to the financial markets. Bill Sterling, Global Strategist with C.I. Global advisors has suggested that much of this confusion is related to what he calls the 'evolution of revolution'. This evolution is still in its infancy, involving multiple revolutions, with each revolution dramatically accelerating. Furthermore, the scope of these revolutions is becoming increasingly global. Technological innovation is not merely about computing power, but about its application to the gamut of how people work, play and live. Examples of areas that have been greatly influenced by technological change include telecommunications, genomics and of course, entertainment.

The increase in market volatility can, in part, be traced to the acceleration of change and people's adoption of this change. Sterling cites the example that it took 50 years after commercial introduction before 25% of households adopted new technologies such as electricity and cars, while it has only taken 7 years for 25% of households to adopt the Internet.

Effectively, venture companies that would have historically remained venture for years are now going public before they have longer earnings records. Triax Growth Fund, one of our recommended Labour Sponsored Investment Funds, has a position in Research In Motion (RIM) which when Triax invested in RIM, was not a public company. Many investors invest in such companies without understanding what they really do, taking on undue stock-specific risks, which is why we consistently recommend mutual funds over stocks, to reduce volatility.

So, as an investor who is wondering what this all means to your RRSP, what can you do to partake in the opportunities that this storm of innovation is creating? You could throw yourself into the whirlwind, following and responding to every bit of information and opinion by which investors are persistently bombarded. Or, you could attempt to chart a calmer course through the eye of the storm and stay that course for the longer term.

As change drives the markets in which we invest, the more important it is that we remain focused on investment fundamentals all of which we can help you with.

1. Have a plan

We can't stress this point enough. Most of us typically invest with certain goals in mind, be it retirement, children's education or a new home. Charting a course toward these goals will help you select investments that will meet these goals within your time horizon and risk tolerance.

2. Diversify your investments

Regardless of how you construct a portfolio, be it through investment style or asset allocation or internationally. Diversification can help or capture much of the market opportunities, while potentially reducing the risks you are taking.

3. Stay invested

Market timing requires that you can successfully time when to get in and out of the market. With large market moves occurring within shorter and shorter time periods, market timing without missing much of the markets upside is more difficult than ever. For example, during the 5 year period between July 1, 1994 and June 30, 1999, if you had missed the best 30 days of the S&P 500 index your returns would have been 8.99% versus the 27.66% you would have had if you had been fully invested through the entire period.

4. Invest for the Long Term

Time invested can significantly reduce risk, particularly for equity investments (any investments based in stocks - such as our equity mutual funds shown in the Investment Options Newsletter - email us for more information). With the speed of change accelerating at such an unprecedented rate, the volatility in the financial markets will continue to be a factor with which all investors need to be concerned. However, we are convinced that the markets will favour those investors who focus less on the whirlwind around them and more on the long-term fundamentals.

Economic Update

In a recent meeting with our economic analysts, they summarized their outlook for the coming year and projections for economic growth.

The firm foresees an economic slowdown in the first half of 2001 until summer or early fall, but do not believe it will be recessionary, the slowdown will be mitigated by significantly lower interest rates; with economic growth accelerating into 2002.

RRSP Carry-Forwards

When you think about RRSP carry-forwards, two things should come to mind: Unused contribution room and undeducted contributions. Even though both are referred to as RRSP carry-forwards, they are significantly different.

RRSP Unused Contribution Room

Unused contribution room is the accumulation of the amount you are entitled to contribute to an RRSP in a particular year less the amount you actually contributed to your or your spouse's RRSP. This unused amount is carried forward until you reach the age at which you can no longer contribute to an RRSP. Commencing with 1991, this carry forward of contributions can be carried forward indefinitely.

An Example: In 1999, Jim had eligible contribution room of $13,500 but he was only able to contribute $10,000 due to cash constraints. The unused RRSP contributions of $3,500 can be used in future years. If in 2000, he is able to contribute $13,500 to his RRSP based on his 1999 earnings, his total contribution room including carryovers from prior years will be $17,000 ($13,500 current RRSP room + $3,500 unused carry-forward room).

RRSP Undeducted Contributions

A less understood fact about RRSP contributions is that you do not have to deduct them in the year they are made. RRSP undeducted contributions are contributions that you have made to you or your spouses RRSP for which you have not taken the tax deduction. Keeping in mind that the contributions still need to be within your RRSP limit.

By making a contribution, you are able to take advantage of the tax deferred compounding within the RRSP. If you expect to be in a higher marginal tax rate in future years it may be beneficial to hold off on taking the tax deduction in the current year and carry-forward this undeducted contribution to a future year. You will not be getting the benefit of this tax deduction until the future and therefore your current tax liability will be higher than if you take the tax deduction now.

An example: This year, Susan has made a $5,000 contribution to her RRSP. The tax deduction for this contribution could be made in this year or in a future year. If Susan takes the tax deduction this year, she will save approximately $1,300 in taxes. However, she has recently been given a significant salary raise. As a result of this raise, she will be in a higher marginal tax rate in the future and this same $5,000 RRSP contribution will result in a approximately $2,000 tax savings. Therefore, by holding off on taking the tax deduction till the next year she will save an additional $700. If Susan delays taking the deduction till next year she will have to pay the $1,300 of tax this year and will realize the $2,000 savings next year.

Keeping Track of Unused Contribution Room

Luckily, CCRA (Canada Customs and Revenue Agency) keeps track of all unused RRSP contribution room and reports it to you each year on your Notice of Assessment. Therefore your 2000 Notice of Assessment which you will receive in 2001 should report any accumulated contribution room as of the end of 2000.

If you are unable to locate your latest Notice of Assessment or you are unsure that the amount reported is the latest amount - you can always call CCRA - TIPS (Tax Information Phone Service). at 1-800-959-8281 or visit their website at

In order to use T.I.P.S. you will need your Social Insurance Number and the amount reported by you on line 150 of your 1999 tax return.

Overcontributions to your RRSP

Every individual is able to overcontribute up to $2,000 without penalty. These overcontributions are not tax deductible.

Overcontributions above $2,000 are subject to a penalty tax of 1% per month.

Note: The above article is for information purposes only and should not be construed as offering tax advice. Individuals should contact their personal tax advisors before taking any action based upon information in this article.

Fund News

Mackenzie Group of Funds has added their name to the beginning of their funds for easier identification. For example: Ivy Canadian Fund will now be called Mackenzie Ivy Canadian Fund.

C.I. Funds have merged a few of their funds: 
C.I. Canadian Equity Value has merged with C.I. Signature Canadian.
C.I. Global Small Cap has merged with C.I. Signature Global Small Companies.

Switchability is now available for all StrategicNova Funds. The four fund families include Navigator, Nova, O'Donnell and Strategic Value.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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