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How can I get serious about successful investing?

There are four basic types of people, each with differing mindsets when they approach investing; the Sideliner, the Gambler, the Hobbyist, and the True Investor. If you want to be a serious and successful investor, you must mindfully recognise the erroneous attitudes of the Sideliner, the Gambler, and the Hobbyist.

The Sideliner Sideliners are fearless in taking action as long as they are in the audience and won’t ever get bruised. They shout, stand, and clap, loving the action of a bystander. Sideliners love the excitement of stock market news and the investor’s game. They often look at how the indices, a stock, or a fund performed. Observation alone never gets you in the game of investing. Sideliners may feel it is dangerous in the arena of the investor.

The downside Sideliners are analytical and love running numbers hoping to reduce most risk by comparing return percentages. Yet, out of the paralysis of information, fear sets in, and they make minimal purchases to play it safe. The sideliner is a silent observer possessing discernment for weighing facts, yet witnesses other people’s investment success without taking action to enjoy investing personally.

The Gambler These people are confident thrill seekers who enjoy the casino, horse race, or scratch-and-win tickets, unlike the Sideliner. They confuse play gambling with risk tolerance, spend recklessly, consider that investment principles are for misers, and don’t seek the guidance of an advisor and consequently have a retirement portfolio that looks broke.

The downside The Gambler is comfortably numb and usually gets punished with frequent losses for taking above-average risks. They might buy an investment based on listening to the talking heads in the trading media, buy penny stocks, or low-priced failing company stocks — all based on uncredentialed hearsay. Because they think they might make some fast money, they believe they are investing but are not. Rarely does a Gambler stay invested for the long term.

The Hobbyists They buy things and investments based on their emotional value more than on investment value. As collectors, they buy for popularity status, notions of status, aesthetic gratification, and pleasure.

The downside Hobbyists, when excited, may jump to buy anything referred to them by word of mouth or a talk show host. They may own all the British Royal plaques on a wall or the top “500 must-see movies before you die”. Financial perspective gets lost because several investment funds may be bought by virtue of historic popularity instead of the potential for future gains. Because collections have been known to go up in value, they think they are investing. They do not understand the old Latin proverb “Non Quantum Sed Quale”, meaning it is not the quantity but the quality that counts.

The True Investor Utilizing an advisor’s wisdom, they buy suitable investments. Unlike Sideliners, they act. Unlike Gamblers, they minimise risk. Unlike Hobbyists, they buy based on investment value.

Investors are defined by their knowledgeable expectation for financial gain employing a principled process to minimise financial risk. Many also make it their practice to utilise professional managers and advisors when investing.

Actual investors act with a vision to achieve excellent returns on their investments while exposing themselves to mitigate the risk that suits their investor profile while enjoying the actions that lead to real financial success. It all comes down to how you think and whether you’re considering investment action.

Three types of Key-Person Insurance for your business

If you are a business owner, you may have an individual critical to your success. Insurance can protect you against financial loss if incapacitated in three areas.

1) Key-Person Life Insurance
2) Key-Person Critical Illness Insurance
3) Key-Person Disability Income Protection

Key-Person Life Insurance Life insurance is usually the foundation of a key-person protection strategy. It provides an immediate injection of capital into the business precisely when needed—when a key person dies. At this time, the death benefit is paid to the company tax-free.

Renewable Term Life Insurance is usually the most economical option over the short term. In certain circumstances, permanent insurance may provide better protection when coverage is needed over a long time.

Key-Person Disability Income Protection Disability insurance can be used for two purposes in a key-person context:
• The provision of a continued salary to a key person that becomes disabled, usually until the earlier of age 65 or recovery from the disability.
• Owner-managers can purchase insurance that provides continued payment of office expenses and salaries during disability, usually for a limited period.

Key-Person Critical Illness Insurance Critical illness insurance provides protection when a key person is afflicted by a specified disease or health problem that does not necessarily render them disabled but affects their desire or ability to work. Depending on the policy, this insurance coverage can pay a lump sum, or an income payable to the business, to help cover losses created by the absence of or lower productivity of the individual.

How does life insurance benefit a Testamentary Trust?

A testamentary trust is established using a will when someone dies, including the following types which direct a named trustee to manage and distribute assets and income to named beneficiaries of the trust.

You can designate the number of years it will survive, within permissible, legal limits. The trust becomes effective at the time the will is probated. The assets undergo the probate process and are therefore, exposed to creditors’ claims. Note: If your intent is to avoid probate, a living trust would be a more suitable alternative especially adapting the use of life insurance. However the potentially lower marginal tax rates allowed with the testamentary trust, needs to be weighed against potentially higher future income tax payable. When using a testamentary trust (versus an inter vivos trust) make sure your beneficiaries are properly specified to work according to your trust directives. A qualified tax advisor should assist you as you make these decisions.

Individuals commonly choose between two types of trusts: family and spousal.

Family trusts

Minor Trust This trust protects the interests of underage children.

Protective Trust This trust protects any family member with special needs such as:

• Safeguards adult children’s assets from creditors or divorce settlements.

• Manages funds for spendthrift adult children.

• Minimizes disclosure of small business assets that could be susceptible to lawsuits or creditors.

Spousal trusts are established to provide your spouse with funds.

• Protects the testator’s children’s assets should your spouse remarry or can assure the inheritance of children from a previous marriage.

• Reduces income tax through income splitting.

How are trusts funded?

If an estate will have significant capital gains tax due and/or debts, consider using life insurance to cover all liabilities. You can also increase the death benefit to pay off business agreement liabilities (if any) and provide specific trusts with the necessary cash.

What powers do you assign to an executor?

Consider what is involved before naming or agreeing to act as an executor.

• An executor carries out the instructions in your will. Co-executors can share the task.
• Jurisdictional laws define what the executor must do, whether they are a friend, relative, professional, or a trust company—however, the will can specify even more extensive powers.
• The executor may have to deal with some or all of the following at an emotional time: a funeral home, beneficiaries, past or ongoing taxes, insurance and investment companies, government and business pension departments, real estate agents, lawyers, accountants, appraisers, stock brokers, and business partners.
• They may also be empowered to convert the estate to cash or divide assets equally among beneficiaries. They can also make payments to the parent/guardian of a beneficiary in most cases.
• The executor (especially if inexperienced in legal or financial matters) should know how complex the estate is before agreeing to the task. If necessary, appoint a co-executor who is a legal and accounting professional.
• Have a clear and objective idea of what will be involved before asking someone to be your executor and agreeing to act as one.

Discuss the parameters of an executor with your lawyer, before enabling one, or taking on the responsibility if given or offered to you.

What income advantages can segregated funds offer?

Segregated fund policies are unique insurance-related products with some guaranteed investment features that can benefit both your capital and income for years.

· Premiums are paid to the insurer for an insurance policy. These monies are allocated to segregated fund investment options.

· An investment manager then invests these premiums in the segregated fund. He invests in stocks, bonds or other assets, according to the fund’s stated investment objectives.

· Through the insurance policy, you can take advantage of unique benefits that can bring more certainty and flexibility to your financial strategies.

· Where a segregated fund invests in aggressive growth equities, there are some unique provisions that risk-averse investors may prefer. Often a portion of the capital invested may carry an agreement to be returned after the timing of maturity. Check the contract provisions which often include reinvesting options at certain junctures of time which also should be understood.

Guaranteed retirement capital and income

· Lifetime guarantee on your income Some policies offer some control over your retirement income by providing you an income for life. With a lifetime income benefit option, your income may not decrease regardless of how the segregated fund performs unless excess withdrawals are taken. This may give some protection against the risk of outliving your money, market volatility and inflation.

· Maturity guarantee on your capital Segregated fund policies provide some certainties to return a percentage of the premiums paid into the segregated fund (less a proportional amount of redemptions), depending on the product selected.

Make sure that you pay careful attention to the contract terms and time periods relating to any mention of a certainty regarding the return of a percentage of premiums paid. Go over this carefully with your advisor.

What are the warning signs of over-indebtedness?

Too much debt can threaten your future and destroy your peace of mind. Here are five warning signs to watch for:

You are spending more than 20% of your after-tax earnings on debt. Total up all you owe, excluding your mortgage, e.g. student loans, car payments, and credit card bills. Now total up how much of your after-tax income is dedicated to servicing this debt.
You are paying for daily essentials with credit instead of cash. Consequently, you are close to the credit limits on your cards. Credit cards charge notoriously high interest rates, which is exasperated by compounding when credit cards are not paid off monthly. This can also increase your actual gross cost of goods purchased.
You are deferring important expenditures. You may need maintenance work (on your car, your home, and your teeth) as you struggle to get by.
You seem to spend your paycheque the day you get it. This may be a sign that you’re also over spending, an activity that leads to debt.
You are not differentiating between ‘good’ versus ‘bad’ debt. Good debt is money borrowed for productive purposes to help generate wealth over time (such as an education, build a small business, or purchase real estate). Fancy cars, expensive vacations, restaurant meals, and over-indulgent gift giving may indicate a lifestyle that for many do not justify the average household’s paycheque.

If you are in serious debt, consult a debt counselor who will arrange a repayment schedule with your creditors.

Be careful not to maximize your HELOC Debt

Consumers are shifting unsecured high-interest credit card balances and debts such as car loan balances to a low-interest Home Equity Line of Credit (HELOC). This transference happens on a larger scale when people consolidate their debts while backing them with their home value. Once your home secures this debt, it is no longer unsecured debt in your portfolio.1

You may indeed be able to save a sizeable chunk of interest by transferring debt from a high-interest credit card to a low-interest HELOC. For many, this works well insofar as they have an intelligent debt repayment plan in place.

When developing a financial strategy, assess all of your credit cards and other loans, including a Home Equity Line of Credit (HELOC). Total your combined debt while you weigh this against all of your retirement and your non-retirement assets.

A safety precaution always estimates your decisions about how they will impact your net worth statement when subtracting liabilities from assets. Adding in your HELOC debt with your portfolio of obligations gives you proportional insight into your actual net worth. Add your HELOC level of debt alongside your unsecured credit cards. Compare interest rates, fees, and other features and the time it will take to pay these loans all off (some calculators do a great job comparing this).

That said, be cautious using HELOC debt as quick loans for vacations, 2nd residences, extensive renovations versus selling and repurchasing a new home, vehicles, businesses, or investments. HELOC credit cards offered with most lines of credit will also reduce your home equity value.2

This growing shift of unsecured credit card debt to HELOC debt enticed by lower interest rates (related to your mortgage) helps the lenders’ balance sheets because this debt, once transferred, becomes secured collateral against real estate assets then owned at a higher proportion by the bank. Taken to the limit, if the real estate market prices drop, your debt may surpass your home value — this happened in the 2007-8 mortgage debt crisis. Think seriously about reducing your debt portfolio, especially if you hold a lot of HELOC debt.

Many people are inadvertently reducing their home equity in the process of securing previously unsecured credit card debt while hinging it to and reducing their home value. When people sell their homes, they are often surprised that their home equity is considerably reduced after paying their mortgage. Why is this? You must pay all associated HELOC debt during the sale.

Source: Bank of Canada

1 Most credit cards are unsecured by any asset that you own. However, if you accept a credit card linked to your home which offers low interest, this may be secured against your home value. Many consumers are unaware of how this works.

2 If bankruptcy occurs, your home equity generally is safe unless it is secured against HELOC debt. Unsecured credit cards are often simply not necessary to repay should one seek bankruptcy protection. Always read your small print in all contracts. Don’t rely on sales discussions over the phone or in-person until you read the small print. It is only beneficial to a bank or financial institution to shift your debt from unsecured credit card debt to secured debt if bankruptcy ever does occur.

How much life insurance should I purchase?

Determining, how much life insurance is necessary for your family’s financial security will require an objective viewpoint as you assess the following:

Evaluate the death benefit that you need.

Your advisor can assess the death benefit you need, by using a mathematical calculation that is referred to as a “capital needs analysis”. You may want to have enough capital to pay for your funeral, final taxes in your estate, outstanding loans or a remaining mortgage, and/or your credit card debt.

If you earn an income and support dependents, you may need to provide a significant amount of money to invest, from which your family can earn an investment income to provide a quality lifestyle. Life insurance can also provide enough money to cover a child’s education or top up the potential retirement income needs of a spouse if a breadwinner dies.

Where there are two spouses providing an income for the family, many couples purchase enough life insurance to reciprocally protect the potential income loss of one or both income sources, by covering both spouses appropriately.

Business Owners have special insurance needs

In many families, one spouse is employed, and another is self-employed. If one spouse owns a sole proprietorship business, he or she may need to consider income replacement insurance which can create a replacement paycheck in case you become disabled. There may be business-related debts and expenses, which if not paid, can create liabilities for the family.

If you are in a business partnership, you may want to look at establishing a buy-sell agreement, and/or succession planning facilitated by life insurance capital if you or a partner die; or income replacement insurance if you or a partner are disabled and can no longer work at your business.

Critical Illness Insurance

Many are also using Critical Illness insurance for personal or business planning, which can offer capital solutions if one becomes critically disabled. Once you are certain how much you need, your advisor can offer quotes and several plans most suited to your circumstance.

How does a business create a Succession Plan?

Succession planning allows you to transfer your wealth creating potential.

Many who own family businesses, will move into retirement over the next two decades. A delicate process referred to as “succession” or “business continuity” planning can lead to relinquishing leadership roles while transferring their businesses to the next generation.

By developing a succession strategy you can fairly distribute business assets; transfer the power and authority associated with leadership from the senior to next generation; and cultivate family harmony. The successor then becomes the new steward of the family legacy.

An excellent plan will establish the best possible tax planning to limit liabilities that can occur.

How can life insurance pay off my mortgage if I die?

Homeowners typically insure their mortgage and/or credit line debt with the lending institution which sells creditor insurance. This ensures that the indebtedness would be paid off upon the death of the debtor. An alternative route is to purchase a life insurance policy when signing the mortgage papers. Evaluate the following questions when considering buying mortgage life insurance through a lending institution.

Are you limiting your life insurance death benefit coverage? The lending institution’s life insurance death benefit is generally limited to the amount left owing on the mortgage (according to its amortization schedule). Conversely, if healthy, most people can purchase an amount well over their home mortgage debt. An increased death benefit could cover multiple liabilities such as increased debt resulting from fluctuating lines of credit, credit cards, or home renovation loans with any creditor.

Can you establish or change the beneficiary? Owning your own distinct life insurance policy allows you to designate and/or change a beneficiary who would have the choice of using the money for an alternate purpose, as circumstances require. For example, a surviving spouse may simply desire to keep a low-interest mortgage. He or she would have the option to invest all the life insurance proceeds or pay off higher-interest debt. When using creditor insurance the mortgagee is the only recipient of all of the proceeds.

Is the death benefit creditor-proof? If you own the life insurance policy, the death benefit payment is generally creditor-proof. With creditor insurance only your financial institution collects the proceeds at death.

Who will own and control the life insurance coverage? You have no ownership or control over a life insurance policy bought only to pay off the debt of a mortgage with one financial institution. It terminates upon repayment of the mortgage; or when you rewrite your mortgage with a different financial institution; or if you sell your house, or foreclosure occurs.

How can I ensure the portability of my mortgage insurance? Many people like to shop around for lower interest rates and/or unique mortgages. An individual life insurance policy may be kept as long as you wish, for portability from mortgage to mortgage among different lending institutions, or for other life insurance needs; such as if you were eventually to have capital gains tax payable on your cottage or a second residence at death. This can also be pre-funded when you own your own more permanent policy.

Can mortgage insurance be cancelled? Personally owned life insurance policies cannot be cancelled by the insurer. However, the creditor insurance may be cancelled upon renewal of the mortgage, especially if one’s health deteriorates. Such cancellation may mean that you have become an “uninsurable risk” by the next time you renew your mortgage. It is precisely during a health problem that one might choose to increase the mortgage or associated debt (where the home is the collateral in a hybrid type of mortgage with lines of credit, etc.).

Can you customize your coverage? Unlike creditor insurance that is directed by the creditor to provide protection for the creditor, personally owned life policies allow individuals to tailor their coverage to their specific needs and requirements. Such flexibility could allow for the inclusion of policy provisions that would allow for the purchase of additional insurance regardless of health, the conversion of a term policy into permanent coverage, or a variety of other customizable options to meet individual needs.

Will a surviving joint-owner retain coverage? Creditor insurance may cover two parties who jointly mortgage their property. However, it pays only on the first death, even if the two were to die. When one spouse dies, creditor insurance no longer covers any survivors. In contrast, by owning your own insurance policy, two spouses or partners may each own separate life insurance death benefits. In the case where both parties die, double the benefit would be paid, thus adding increased value to the estate. If one survives, the coverage on that life continues.

Can you avoid future insurance medicals? If one is currently healthy it may pay to take the opportunity today to acquire a personally owned life insurance policy––or increase the coverage on an existing plan––and keep it over time. In this way, you may be able to sidestep the limited future functionality of mortgage insurance offered by creditors. Many group insurance plans and creditor plans offered by insurance companies are asking for full medicals before initiating the coverage.
What about group plans offered at work? Similarly, insurance offered by any group benefit plan, especially in light of plant closures, carries the risk that group insurance would be lost at some point. And any plan offered by a bank or a credit card is actually some form of a group plan offering no true ownership, portability, or guarantee of long-term continuance.

Note: Before cancelling or excluding the use of creditor insurance, make certain that you are properly protected with a life insurance policy benefit appropriate to your financial needs. In some cases, you may need to assign a life insurance policy for collateral at a financial institution. There may be disability insurance coverage included with your creditor insurance that may be important to acquire or retain. There may also be costs or fees associated with cancelling or replacing an existing policy.