Managed Money Reporter Newsletter — Issue 135, April 1998


Editors: Carl Spiess & Allan McGlade



What Is Driving These Markets?

By Carl Spiess, Associate Director

As the TSE and DOW continue their record setting pace, the inevitable question is: "when will it all end?" The answer, according to the demographic thesis being set forth by popular speakers David Foot, Harry Dent and David Cork, is around 2015. Why? The Baby Boom.

The concept is amazingly simple. The North American baby boom occurred roughly from 1945 to 1965. That means the average boomer was born in 1955. Let's look at the life of the average boomer and see the impact they have had on the various markets they have entered in their lives.

In 1975, the average boomer turned 20. What do 20-year-olds do? They move out of their parent's homes. They buy a car, go to college, or begin work. Most often they rent an apartment and furnish it by purchasing consumer goods. In the 70's apartment rental prices went up, and consumer prices (inflation) went up. The late 70's were marked by double-digit inflation as consumer demand outstripped supply.

In 1985, the average boomer turned 30. The average 30-year-old has been married 5 years, and has an average of 2 children, 2.5 years of age. 30-year-olds move out of their apartments, and buy houses to have room for the kids. House prices skyrocketed in the late 80's as boomers moved to the suburbs, and due to high demand for mortgages and government borrowing, interest rates hit record levels.

Now boomers are in their 40's. Most forty-year-olds are paying off their houses, and for the first time, thinking of retirement. They start RRSPs and investment accounts and thus stock markets are soaring. There is little demand for borrowing, so interest rates are declining, making GICs less attractive and compounding the upward pressure on stocks.

Why is this stock market rise different from the short-lived inflation and housing bubbles? Because boomers all furnished their apartments once, buying refrigerators, washing machines etc. at the same time, driving up consumer prices. Similarly most people only buy a house once or twice, you don't buy one each year, thus the boomer driven housing boom was short lived. However, the average boomer, now 43 years of age, will invest in the markets for each of the next 22 years until retirement. That is 22 more RRSP seasons, and 264 more monthly pre-authorized mutual fund purchases, all building the demand side. At the same time, governments are reducing their deficits, and there are fewer financial assets to buy, shrinking supply.

Harry Dent: The Great Boom AheadWhen will it end? Perhaps around 2015, when the average boomer turns 65, and begins to draw on their savings. (Note however, that no retiree spends all his or her money in the first year, thus a huge collapse in 2015 may not be imminent.) In the meantime, it makes sense to have your portfolio fully invested, despite the odd market fluctuation.

As David Foot says, demographics can only explain 2/3 of everything. The above description, while powerful, ignores some secondary effects, like the boom echo. But the attached chart, from Harry Dent's The Great Boom Ahead does make for a very powerful argument, one that we think will make you money over the coming decade.

RESP Worth Looking At

1998 Budget Enhances Plan

By Barbara Daley, FCSI

With the changes announced in last February's budget, the Registered Education Saving's Plan may now be the savings plan of choice when planning for your children's future. The latest changes boil down to one main feature, the Canada Education Savings Grant (CESG). This new enhancement may be just what was needed to make this worthwhile for you. Lets look at it more closely:

Purpose The RESP can be used for educational purposes only

Contribution Limit $4,000 per beneficiary per year for 21 years, to a lifetime maximum of $42,000 per beneficiary

Canada Education Savings Grant (CESG) 20 per cent on the first $2,000 of annual RESP contributions made after 1997, to a maximum of $400 per year for beneficiaries 17 and under. Maximum total will be $7,000 (20% x $2,000 x 18 years)

Carry Forward You cannot carry forward unused contribution room; however, you can carry forward unused CESGs until beneficiary turns 17; accumulation begins in 1998

Withdrawals Contributions can be withdrawn at any time tax-free; however, CESGs may have to be repaid and restrictions may apply to future CESGs

Education Assistance Payments (EAPs) payable to the beneficiary who is in full-time attendance in a qualifying program at a post-secondary institution - EAPs are taxed in the beneficiary's hands

Taxation Contributions are not tax-deductible; however the investment grows on a tax sheltered basis until the EAP is made - EAP is reported as "other income" by the beneficiary

Maturity RESPs mature in 25 years - in a single beneficiary plan, if the beneficiary does not attend a post-secondary institution and no other beneficiary has been named, the CESG must be repaid - In a multi-beneficiary plan, the CESG can be used by other beneficiaries to a maximum of $7,200 per beneficiary, the remainder must be repaid - you can currently transfer up to $40,000 of growth to your RRSP, provided contribution room is available; beginning in 1999, this amount increases to $50,000How in-trust-for method stacks up

In the above study, a comparison is made between the traditional Informal Trust Accounts (ITF) and the new RESP. Clearly the RESP wins out if your child continues his/her education at an approved institution. However, if your child opts out of post secondary education, the deciding factor rests on whether or not you are able to transfer the plan growth to your own RRSP. If you are, then the difference between to two plans is a mere 1%. On the other hand, if you have fully utilized your RRSP contribution room, the penalty is greater than if you had chosen the Informal Trust Account in the first place.

Remember that you can increase the odds of a child utilizing the plan through the use of a multi-beneficiary plan!

We have a number of different options available, utilizing some of the best performing mutual funds as their growth vehicle. To receive an information kit, call a representative of the Mutual Fund Reporter Team at (416) 863-7777 or 1-800-387-9273.

New Investment Options

We have just issued an updated version our brochure Your Investment Options with performance numbers up to and including the first quarter of 1998. This publication outlines the investment choices available to clients of ScotiaMcLeod. If you are a client of ScotiaMcLeod and would like to receive a copy of Your Investment Options, please email us and we will send one to you. Please include your name and account number in the email.

 



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