Mutual Funds – Page 2 – Adviceon Library

Investing is a strategic process, not the final goal

Investing is the strategic planning process, not the final goal It is important to realize that investing is not the goal. The goal is based on a future result that you aim for using mathematical calculations. Investing is what you do in the meantime while facing a multitude of circumstances in the world that affects the market where stocks and securities lose or gain potential to grow, which means, intermittently affecting your control of the end results in relation to your goal.

While you are young and have a family and/or close dependents, you also want to enjoy life and create memories. You want to live in the present to minimize fear of the future during the investment process, being mindful that preparing to retire means engaging in the process with an advisor using timeless principles.

Perhaps you’ve decided that you must accelerate your combined RRSP savings if you are to possibly realize your retirement dreams. Here is a strategic process that works all year round, well ahead of, and therefore, eliminating the annual RRSP deadline frenzy. This investment also works well when investing using TFSAs.

A systematic investment strategy called Dollar-Cost-Averaging (DCA). By pre-arranging a schedule of making equal monthly investment purchases of a mutual fund, you can realize big advantages:

1) Get your RRSP money working earlier. Every year, a good deal of money begins working long before the RRSP deadline. This gets part of your fund money invested earlier every year in small amounts you can afford. DCA allows for a convenient pre-payment of your annual RRSP contribution, instead of in the last anxious moments of February before the annual deadline.

2) You can profit from more gains after buying during market downturns. You needn’t worry about market-timing decisions when you buy your mutual fund units. Investing a fixed dollar amount every month adds a benefit over the year. You will purchase more mutual fund units when the price is lower, fewer when the price is higher. While consistently purchasing throughout market declines, when units cost less, you buy more units with the same dollar. Thus, fears of the market dropping in value are replaced with the knowledge that you will eventually own far more fund units over time, as long as you continue to invest in the same scheduled manner when the market is down. The purchases are scheduled, not “timed”. There is a vast difference.

Not even the experts know exactly when the market will peak, or stop declining. This means that by waiting to purchase at a lower unit price, an investor might miss buying lower if the market begins climbing back suddenly. But, if you schedule consistent buying, using DCA, you won’t miss buying the lower-priced units.

What is the upside of DCA in a lower priced market? Fund units purchased during temporary market downturns can be very profitable once the market recoups any loss. Subsequent upward moving markets will greatly increase the value of every unit held (especially with the addition of those lower-priced bargain units bought when the market value declined, and as it inclines above each unit price purchase during periods of market gains). More units bought at lower prices, both while a market loses value and while the market swings back gaining momentum during a major bull market growth spell, offer the potential for future profit.

3) One more benefit. You’ll be less influenced by market fear factors if you remember: Investing is a strategic process, not the final goal. Dollar-cost-averaging fund purchasers are isolated from negative market psychology. Contrary to the crowd, they now automatically buy through periods of opportunity when the price is low, the time when most people often do the opposite — sell out of fear. Dollar-cost-averaging encourages determined, intelligent, and disciplined investment behaviour.

How do you deal with RRSP transfers upon death?

When RRSP assets are present in an estate, there are a few steps to follow to assist transferal in the event of inheritance, death or separation.

A surviving spouse can transfer the full amount of a spouse’s RRSP as a refund of premium by rolling it into his or her RRSP or RRIF, life annuity or term annuity depending on age. Preferably, name your spouse as the beneficiary under all RRSP plans when you set them up, or make this provision in your will. Note: Your advisor will be able to look at your situation and advise you.

If you leave no surviving spouse but there is an adult child or grandchild who is ‘financially dependent’ upon the deceased at the time of death, the full RRSP can be transferred tax-free to the child’s RRSP or used to buy an annuity or RRIF. Minors, however, must use the funds to purchase an annuity with payments to age 18. Note: Your advisor should be consulted to determine if an individual is ‘financially dependent’.

In most cases outside of financial dependency, the funds are taxed in the hands of the deceased on his or her last tax return. Life insurance strategies can offset the large tax liabilities associated with RRSP/RRIF assets that seniors will face, thus increasing inheritances.

Market Indices

The links on this page of the financial market indices for your perusal is information provided as is and solely for informational purposes, not for trading purposes or advice and may be delayed.

Indices & Data Links

- Latest TSX numbers, market commentary, other North American stock markets; please click here
- Latest Canadian dollar exchange rates (USD, EUR, GBP): please click here

Source: Google Finance | OANDA Currency Tools

To retire well, maximize your income strategies

Life expectancy has increased on average by up to 10 or more years of life longer, than during the last century. Consider the serious question: will I outlive my wealth?

We invest in what people buy. By investing in an equity investment fund or stock you indirectly invest in many important consumer needs. Here are a few:

Businesses relating to what consumers buy such as the energy;
The fertilizer farmers buy to grow the food that we eat;
The vehicles that we drive, the transportation of goods via truck, rail, or air; and
The homes that we furnish or renovate. As you retire, you may invest in what you consume as a retiree when you invest in equity funds.

Baby boomers still affect our economy An alternate economic forecasting method informs us that we are affected by demographics. Baby boomers hold the highest average net worth of all living generations. Now retired or near-retirement, they still buy new cars, take expensive trips or buy retirement homes in the southern USA, buy their grandkids toys, use gasoline and consume groceries. They use health care products and eventually retirement homes.

Now, baby boomers are shifting to make financial security their first financial priority We have witnessed an extended period of a rising, bullish markets pre-2007 and post-2008 that compare historically to another boomer generation—a time that we will refer to as the post-war spending era when the spending of the majority of the populace also benefited the economy.

Like the boomers of the Frank Sinatra generation who entered their spending wave post-World War II, the current Beatles generation—many with four or more children, have moved through an incredible spending cycle and now are entering pre-retirement positioning.

Note: The Beatles generation refers to the current baby boom generation that is now approximately 50 to late-60s The Frank Sinatra generation refers to the baby boomers’ parents – those that were nearing retirement age in the last spending period between 1945 and 1965 and are now close to the end of their lifetime.

Consumerism versus asset accumulation Today’s boomers have finalized the education of the children, become empty nesters, seen grandchildren born, are now building and consolidating large net worths, while considering or entering the period of retirement.

At this time, the largest populace is between age 50 and 60-something. With many new advances in technology, many boomers like Bill Gates or Steve Jobs brought innovation and entrepreneurial skills to business and were among the highest paid in the workforce. They comprised three-quarters of the income-generating labor force. They’ve held power—to spend! Now they hold power to invest and need to have their assets managed well to create a secure income for a lifetime.

An aging Baby Boomer populace must invest for security As seniors look to and enjoy retirement, many have made their final mortgage payment, and some have inherited parental wealth. Now, the baby boomers’ discretionary investing power is immense as is their large population—to the extent they have and still enhance our economy as they spent a lot of money.

Make sure you have a wealth management professional working for you Creating a secure income will be the primary focus. A generation predictably works, saves, and finally spends as they age. The average individual looks for increased quality and spends more money as they approach age 50 and onwards. Baby boomers right now are willing and able to purchase goods and services with momentum which will decrease over the next 5-10 years as they shift from spending to protecting their wealth.

Investing their retirement assets strategically using financial advisors to manage and to protect their money will increasingly take precedence as they become “contented” utilitarian consumers increasingly expect the investment management industry to boom.

The author, Montaigne wrote about his father, who inherited a large estate, yet was very careful to manage his money.

“He was very fortunate in being able to keep his desires down to his means and to be pleased with what he had.”

Call us to set an appointment to learn how to maximize your income for a lifetime of retirement.

The scope of a good financial strategy

A good financial strategy is multi-faceted. It must anticipate change and reflect your specific financial goals and objectives while considering your level of investment risk tolerance.

A personalized financial strategy can be tweaked to reflect your changing life needs. Whether you’re starting a new family, preparing for retirement, or running a business, we will work with you or your business to build a plan to meet your needs. A customized plan can help you manage risk and bring your goals within possible reach throughout your life. Major purchases such as a home; retirement; and other life events, such as a disability or need for long-term care necessitate flexibility.

Creating your dream financial strategy

First, we will listen to you. We’ll help you create a plan just right for you. You can enjoy peace of mind knowing you have a financial strategy that provides you with the confidence that all your financial resources are working together toward your specific long-term financial goals.

Next, we’ll help you to devise a plan. The program will aim to address investment and retirement planning, minimizing income and estate taxes, assessing your life and disability insurance, will and estate planning needs.

Your plan should be flexible enough to anticipate life’s many fluctuations. Financial circumstances and responsibilities change over time, such as a career or income changes; marriage; the birth and education of your children or grandchildren; major purchases such as a home; retirement; and other life events, such as a disability or need for long-term care.

A financial strategy is essential for a secure future

When making a plan for anything in life, choosing a career, getting married, buying a car, we must spend hours going over lists as we determine priority and timing. We must have clarity as we develop our essential plan. In his famous book, Essentialism, Ewen McKeown suggests that while sorting out priorities, we must decide what not to do while we are working on what we must do, and that “When we really have clarity of purpose, it leads to success”. (Ewen has the third-highest following on LinkedIn so he knows something about priorities)

A good financial strategy is multi-faceted. That is why it needs to be developed and governed by a credentialed financial advisor. In his latest best-seller, “The Total Money Makeover”, Dave Ramsey notes: “Build wealth. Invest and enjoy counsel from advisers with a proven track record. ‘Even the Lone Ranger had Tonto'”.

Here are some priorities to achieve financial security – priorities that one must organize well:

Have emergency funds on hand Save at least $1,000 cash and aim to build this up to $5,000. This can come in handy for any emergency that comes as a surprise.
Eliminate all your bad debts List your credit cards, smallest to the largest balances–then pay off these debts, from the smallest to the largest, regardless of interest or amounts, one at a time. Make minimum payments on the rest. This will encourage you as you see each card is paid off.
Save for a home downpayment Save for a down payment or cash purchase of a home. If you have a home, aim to pay down the mortgage, especially now when interest rates are low.
Pay yourself first Invest 15-20 percent of your before-tax income in retirement. Ramsey from his book The Total Money Makeover, notes “Only people who like dog food don’t save for retirement”.
Save for your children’s college education. Your child can’t get much of a job these days without an education though it is not necessary if he or she creates a great business. However, not everyone is Bill Gates or Steve Jobs.

Source: The Total Money Makeover. Dave Ramsey | Essentialism, Ewen McKeown

Perspective on how we perceive time to invest

In his book, the neuroscientist Dr Daniel J. Levitan indicates why our time remaining to invest may pass by faster as we age than when we were younger. He explains “that our perception of time is…based on the amount of time we’ve already lived.” The Organized Mind, (Penguin Canada Books, Toronto, 2014)

Time from a financial perspective

Dr Levitan’s observation may apply mainly to the anxiety people experience as they age. As the time to retirement shortens, some may begin to fear that they might not have saved enough for retirement. Procrastination takes its toll on compounding investment gain potential. When looking at an average retirement age of 65, the two tables in this article reveal the profound truth about the dwindling of time and the shrinking opportunity time remaining to invest as we age year by year.

Graph Source: Adviceon©

Time offers the opportunity to create wealth.

We must sincerely acknowledge the fantastic opportunity investment time provides the investor. Most people have had lots of time within which to invest. At age 35, we cross over the halfway mark of the time remaining to invest our hard-earned income to the age of 65; at age 45, approximately only one-third of our time is left! Please look at the shrinking opportunity of time in the second table, which shows how the availability to have compound gains working for you drastically decreases as time passes.

Some parents begin wisely investing for their children right after birth and get time to work on their side early.

Graph Source: Adviceon©

Why does investment opportunity time get lost?

Greed and fear work against investing. Many people get caught up in timing the market when influenced by either of the two emotions, greed or fear. Here’s why this never works. First, desire compels people to buy when the stock market (and potentially a fund unit value) is higher. Conversely, fear causes many to sell when the stock market’s value (and possibly a fund’s unit value) is lower.

When you can’t seem to begin investing, make regular investments in promising companies to benefit from a method referred to as dollar-cost averaging (DCA) to level out the peaks and valleys of the market by purchasing at regular intervals. If the value of shares in a fund decreases, you buy more units. Conversely, if they go up, you buy less. Time spent invested in the market, not timing the markets, counts.

Don’t just look at an investment fund’s most recent performance. Instead, look for long-term investment performance over one, three, five and ten-year periods. Moreover, make investment decisions with the help of a professional advisor who has access to investment managers.

Sure-Fire ways to invest for a rewarding life

Here are several tips to contemplate before investing in a mutual fund:

1. Eliminate the unreasonable desire for get-rich-quick profits. No one gets rich overnight after purchasing mutual funds. However, many people may get rich investing in them over the long term (at least 5-10 years). Equity funds (those holding stocks) are affected by the stock market when the market is gaining and when it is depreciating.

2. Identify your investment goals. Will you be saving for your child’s education over 15 years, or investing for retirement over 5, 10 or 20 years? Don’t buy a fund just because it has skyrocketed in value during any one period. Instead, choose the fund most suitable for your investment purpose. For example, keep short-term investments liquid if you put money away for an emergency (it is advised to save three months of income for costly emergencies). You can use a money market fund for this saving, not an equity fund. Consider using equity funds for a more extended investment period of 5-10 years.

3. Invest in several types of funds. Don’t put all your money in one fund basket. A well-rounded fund portfolio utilizes several investment types of securities: equity, balanced, bond, and money market funds, for example.

4. Maximize your tax savings. Register a mutual fund investment (to create an RRSP) if you do not yet own an RRSP. Contributions are tax-deductible in relation to your taxable income, and the investments grow tax-deferred.

5. Position your fund investments. The best place for retirement investments that accrue interest or generate high returns is inside your RRSP because the income on these investments won’t be taxed year by year. Thus, you will gain the advantage of the total yield without the tax on interest-as-income. If you earn 5% and pay 40% in tax, you’ll only get 3.0% in a non-sheltered, non-registered investment (in the RRSP, you’ll get the full 5%). Consider placing mutual funds that accrue capital gains and pay dividends over fewer taxable distributions in a non-registered vehicle or a Tax-Free Savings Account (TFSA).

6. Invest in yourself first. The advantage of owning mutual funds is that you can establish a plan where the money is automatically taken out of your bank every week or month and invested (by purchasing fund units). You probably won’t miss this portion of your pay; try to invest 10-20% of your paycheck using this method.

7. Take investing seriously. Investing is that act of life whereby you put away today what you will need tomorrow.

How can mutual funds help manage financial risk?

How can mutual funds help manage financial risk?

In business and investment, more significant gains are associated with both business success and variable risk. Six risk factors are examined below, along with constructive ways to deal with them.

Risk increases with the potential for gaining wealth in the markets

There is no such thing as gaining wealth without risk. Risk generally increases within any business or investment when the potential for gain is greater. Mutual funds diversly invest in the stocks of many companies. If a business succeeds, its stock price (and dividends) can increase in value and pass that worth on to the fund unitholders.

If many companies’ stocks increase in value in a mutual fund, the investor’s wealth can increase relative to the resulting total net increase in all of the fund unit’s value. In the short term, a mutual fund, like any business, can fluctuate in value, so the risk of losing money in the stock market increases if equity fund investments are held for only a short period.

Defining Investment Risk

The potential for gain generally increases the longer you hold equity fund investments. Because economic performance is uncertain, an investor who seeks growth by investing in the ownership of companies via equity mutual funds cannot have zero risk. Most successful investors realize that the following risks exist yet invest despite these:

• Interest rate risk when increasing could negate gains of certain income funds investing in bonds.
Solution: Maintain a balanced portfolio including equity funds and different types of income funds: money market, short-term bond, and long-term bond funds.

• Business failure risk could deplete the value of any one company’s stock.
Solution: Consider investing in equity mutual funds because they hold many different stocks.

• Purchasing power risk is an alarming reality faced by everyone due to inflation’s historical average, which has been between 3% and 4%.
Solution: Calculate inflation into your retirement planning and consider investing in equity mutual funds over the long term, with the potential to build sufficient wealth to meet increased future budget demands due to inflation.

• Market risk occurs because markets are cyclic, rising, correcting, and occasionally declining.
Solution: Diversify your funds, investing in a family of domestic mutual funds and internationally among foreign mutual funds as not all markets move together.

• Opportunity risk occurs when you cannot invest your money for a potentially better return, such as when you are invested in a locked-in type of investment, such as term deposits, or have tied up your income in monthly payments.

Solution: Try not to lock up all of your money, keeping some in money market funds over any given period.

• Liquidity risk occurs when you cannot quickly sell a given investment, such as an extensive real estate portfolio.
Solution: Invest in mutual funds. If money is urgently needed, funds can be sold and money accessed on any business day with possible costs.

Invest by paying yourself first

Some people never pay themselves first.

After most people have paid for their necessities, there seems to be little left over for investing.

Determine your perspective on investing. Always spending and never investing is a serious dilemma often based on a certain mindset that can easily change for the better. Do you view yourself as a consumer or an investor?

If you see yourself as a “consumer”, you may experience that there is never enough paycheck left at the end of the month for investing. However, is this caused by a lack of income or your own spending patterns? The first barrier to investing is a “perceived lack” of investment capital, often not reflecting reality. Unfortunately, what we think often becomes our reality.

Investors have personal discipline Conversely, “Investors” take an honest mathematical look at their expenses, separating discretionary income from what one needs to live on, knowing that impulsive buying decisions, even to purchase many small things on sale can add up.

This disciplined viewpoint allows them to have money to invest. Once paid, the first “consumption” decision can be to purchase an investment suitable to their goals and objectives. The rest of their paycheck is then spent with no worries on required consumption for the rest of the month.

Investors get good advice, and then act. Many people are impatient or confused when it comes to the science of investing. True “Investors” all have a key characteristic that makes for success — taking the right action with professional advisory assistance. They also understand that without experience and knowledge, investments decisions can be made in haste, and potentially destroy an otherwise good investment plan.