Managed Money Reporter Newsletter — Issue 261, January/February 2011


Editors: Carl Spiess & Allan McGlade


Featured Articles



RRSP Season Edition 2011

2010 Year in Review and Outlook for 2011

While we slip and slide into another northern winter, we can still count ourselves fortunate to be Canadians from a financial point of view. Our country is running a fairly tight fiscal ship, and Canada is not experiencing the same degree of economic hardship that the U.S. and Western Europe are going through. We have one of the best-performing stock markets in the world, and our natural resources—particularly metals and minerals—continue to be in demand.

One hallmark of the Canadian financial system is that it remains cautious, even at times like these. The Bank of Canada is cautioning us weekly about rising levels of household debt; and while this advice may apply to some more than others, it nevertheless represents sound financial leadership.

Investment-wise, it's clear that Canadians haven't got past their jitters from the market crash two years ago. Even though the TSX Composite Index rose 14.45% last year—and returns for some resource investments like precious metals are off the charts—investors are clearly favouring bond and balanced funds over equities. Demographics may be driving this emphasis on capital protection, because Canada's baby boomers are beginning the march into retirement.

Here is a brief outlook for 2011 along with some investing ideas.

Fixed Income outlook and ideas

From what we can see, interest rates are likely to remain at current low levels for a while longer. Bond funds have become so popular for the past two years that many investment firms are profiling their active management of fixed income. Managers are adding incremental value from trading around positions and market movements in bond prices.

High-yield bonds continue to offer good value, but take advantage of the diversification to be found in a mutual fund or exchange-traded fund (ETF). If you are an ultra-conservative investor, or need to be cautious because you are heading into retirement, it's not a bad idea to park some of your money in a 2-year or 3-year GIC and wait for higher rates to emerge.

Equities outlook and ideas

If you have the appetite for it, every economic recovery holds opportunities for equity investors. We suggest that you stay overweight Canada in your equity portfolio because of the continued demand for our natural resources. New reserves of oil, metals and minerals are becoming scarce, while spiking demand from Asia is driving up prices for these important Canadian commodities.

Many investors, especially middle-aged investors, won't want to base their portfolios on resource equities. For them, we recommend dividend funds (and/or ETFs) and those perennially popular and effective monthly income funds. A core of these moderate-risk holdings can work well with a satellite position in resource/commodity investments.

If you believe in global diversification (and that's still a good idea) don't forget to mix in some emerging markets. Media reports of China make it sound like the only mushrooming economy, but India, Brazil and Mexico are right up there too. Just like Canada, Brazil, Australia and Russia all export resources or agricultural products that emerging markets are snapping up.

For more detailed information on the outlook for 2011, follow these links to download Daily Edge from our Equity Research Group and Global Forecast Update from our Global Economic Research Group.

More on looking ahead in 2011

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Contribution season is upon us!

The holidays are over, the bills are paid, and now it's time to pay yourself!

RRSPs continue to be an important savings vehicle for Canadians due to the significant tax incentive that allows contributions to be made with pre-tax dollars. Making an RRSP contribution and deciding how to invest it are two of the most important financial undertakings for many Canadians every winter.

Now an important secondary consideration for many Canadians will be making a TFSA contribution. In fact, for some it may even be a first consideration ahead of RRSPs (see the article The right registered plan, at the right time in this issue).

But first, let's go back to RRSPs. If you aren't making your RRSP contribution through payroll contributions, or in monthly installments through a pre-authorized contribution (PAC) plan from your bank account, you should consider it. Ask us to help you set one up. Using a PAC plan increases your likelihood of meeting your contribution goal each year.

Is borrowing your RRSP contribution a good idea? On the "con" side, Canadians should be careful about increasing their personal debt, and interest payable on RRSP loans is not tax-deductible. On the "pro" side, you are borrowing to purchase an asset you expect will grow in value. If you need to borrow, see if you can start a PAC plan and pay off the loan this same year. Next year, you won't need to borrow.

Now, what about that investment decision? Many people contribute to a Group RSP or a Registered Pension Plan (RPP) at work, and only have a top-up amount available for their personal RRSPs before they max out. We suggest you look at your company plan and your personal investments as one continuous portfolio and make sure you have the right asset allocation across your entire investment holdings. You can then use your RRSP top-up amount to adjust your asset allocation, or to rebalance your holdings back to your ideal mix. Remember, we're always here to provide advice!

Things to remember this RRSP season:

Deadline:
Tuesday, March 1

Contribution Limits:
For 2010: 18% of earned income to a maximum of $22,000, less any pension adjustment amounts if you participate in an employer pension plan. Check your 2009 notice of assessment for the exact amount you can contribute. The maximum contribution room for 2011 will be $22,450.

RRSP Loans:
Visit your local Scotiabank branch or give us a call. We would be pleased to assist with an introduction to Scotiabank RRSP loan specialist.

TFSA tips

Many Canadians don't realize that their unused TFSA contribution room continues to accumulate annually whether they have opened a TFSA account or not. If you have not made a TFSA contribution yet, you now have contribution room of $15,000 (3 years times $5000).

TFSA contributions must be made with after-tax dollars, but investments grow tax-free inside the plan—and all withdrawals are completely tax-free.

TFSA accounts are great places to hold interest-bearing investments such as bonds and even GICs, because the interest income escapes taxation every year at your highest marginal rate. If you're holding any interest-bearing investments in a non-registered account, think about putting them inside your TFSA as an in-kind contribution. See our TFSA page for more.

More on contribution plans

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Investment News

On December 1, Morningstar Canada presented the 2010 Canadian Investment Awards. These awards, along with the Lipper Awards, represent the most prestigious money management awards in the industry. They are worth following because they often identify the best in class mutual fund managers and fund families.

Most notable this year was the dominance of Dynamic Funds. Dynamic won seven of the 20 awards handed out for "best fund in category" as well as winning Advisor's Choice Investment Fund Company of the Year, and Analyst's Choice Investment Fund Company of the Year. Dynamic is a much improved fund company with a distinct style, allowing their fund managers the freedom to run with their best investment ideas. Their success is undeniable, but we believe it is prudent to blend this style with the more disciplined styles of other fund companies.

Other fund companies that fared well were Mawer Investments, Beutel Goodman, and TD Mutual Funds. Eric Bushell of CI Investments was named Fund Manager of the Decade. Eighteen winning funds are on the recommended list of ScotiaMcLeod, and winning funds TD Monthly Income and Dynamic Dividend are on the Spiess McGlade recommended list.

For more information, follow this link: http://www.investmentawards.com/

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The right registered plan, at the right time

Over the years, Canada has done a very good job of providing tax incentives to save in the form of registered plans. There are now three registered savings plans available to most individuals:

Note that a new Registered Disability Savings Plan also allows disabled individuals and their families to put aside extra money for special needs.

This article will examine the life stages of an investor, and offer some basic advice about the order in which to contribute to the various registered plans that are available.

20-something investor

This is usually the decade of finishing education and getting that first job, but no longer the decade of buying a home or starting a family. Young investors do not spend much time thinking about retirement; however, contributing right away to an RRSP will allow for long-term tax sheltered asset growth. If annual income (less than $40k) puts the investor in the lower tax brackets, it likely makes sense to contribute to a TFSA instead of an RRSP. But if the company-sponsored retirement program offers a matching contribution from the employer, this is the way to go. Note that investors are not required to deduct an RRSP contribution in the year the contribution is made. The deduction can be claimed in a future year when higher annual income moves the investor up a tax bracket.

30-something investor

This is an active decade of working, getting married, buying homes and starting families. There is often not much left over to save at the end of each month, although the primary savings vehicle would be the RRSP for current tax relief and long-term goals. The First Time Home Buyers' Plan within the RRSP can also be helpful for entering the real estate market. Otherwise, most RRSP withdrawals are fully taxable at the highest marginal rate. A maternity leave can present a window of reduced earnings to make RRSP withdrawals more economical if necessary. Otherwise, TFSAs can help accelerate saving for short-term goals such as purchasing vehicles or vacation funds. When children are born, it is wise to begin an RESP and start qualifying for the Canada Education Savings Grant (CESG) as well as provincial grants in Alberta and Quebec. Cash-strapped parents should consider approaching grandparents to help get an RESP started.

40-something investor

This is the decade when people start to think about retirement. The retirement plan at work is often in full swing, and personal RRSP contributions become smaller top-ups. Saving becomes the name of the game, especially as mortgages grow smaller and salaries grow larger. RRSP contributions should be maximized every year, as well as TFSA contributions if possible. If kids are in the mix, RESP contributions should reach the level where they maximize federal (and provincial if applicable) grant monies.

50-something investor

Investors anticipate impending retirement during this decade, and sometimes take early retirement. Earnings are at their highest, and maximum RRSP contributions are important for current tax relief. Maximum TFSA contributions are also recommended because withdrawals are so tax-efficient in retirement (as we will see). Chances are that children will be using your RESP savings at this time to attend school. If you saved well, their education should not be a big drain on your current cash flow, meaning that you won't need to curtail your saving for retirement at this critical time.

60-something investor

At last, investors are retiring! It's the decade of the TFSA. TFSA withdrawals are easy, and do not count as income for tax purposes. They can be used for travel and other activities in early retirement without triggering the Old Age Security (OAS) clawback (after age 65). Retirees may no longer benefit from deductible RRSP contributions if they are earning less and have efficient tax planning (otherwise, it can be a worthwhile deduction if needed). RRSP withdrawals are still taxable at the highest marginal rate—so maybe let that plan sleep for a while if possible!

70+ investor

At age 71, the RRSP must be converted to a Registered Retirement Income Fund (RRIF). Now withdrawals become mandatory, and can be managed in the framework of overall tax planning. It's still nice to have that asset, especially as retirement progresses and health care costs may rise. TFSAs still have all the advantages they did in the investor's 60s, and should be maximized whenever possible.

The descriptions above are intentionally generalized to give a broad-brush view how registered plans can help Canadian investors at all stages of life. There will be exceptions to the general rule, although registered plans can make life easier for all Canadians and should be investigated to their fullest. The Spiess McGlade Team would be happy to help you with a personal registered plan strategy. Contact us for help with your portfolio.

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Recommended Link of the Month

Ever since the financial crisis abated, the push has been on to upgrade "financial literacy" among Canadians. Scotiabank Group has weighed in with an excellent web site called Let the Saving Begin. It's easy to read, fun to explore, and we think the best part is the tools section under Invest for your Future.

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    allan.mcglade@scotiawealth.com

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