Managed Money Reporter Newsletter — Issue 203, February 2004

Editors: Carl Spiess & Allan McGlade

Featured Articles

Last Minute RRSP Thoughts

If you have already made your full 2003 RRSP contribution, congratulations!  Relax and enjoy the rest of February. 

For those of you who haven't quite gotten around to making your 2003 RRSP contribution, don't panic.  You have a few days left before the March 1, 2004 deadline.  Choosing amongst the many options available can be daunting so we've included a few last minute RRSP ideas to make your decision simpler.

  • Strip bonds - You say you don't like 2.5% for short term guaranteed investments (GICs)?  Neither do we.  We favour government-guaranteed strip bonds at more than twice the rate of return.  A $5,000 RRSP contribution invested in a provincial strip bond, matures at $10,000 in 13 years - a 5.25% guaranteed rate of return.
  • Labour funds - With up to a $1,750 in tax savings, these funds offer an immediate incentive, and still have potential for growth long term.  We have an in-depth section on labour funds if you would like to know more.  Also, see more in the Fund News section.
  • Contribution in kind - If you have Canada Savings Bonds, some old Bell shares, or other securities in your safety deposit box, you can contribute those to your RRSP and get a tax receipt for the value.
  • Top up an existing fund - While we have over 2,000 funds available, it may be best to top up an existing holding, rather than adding another. We can help with a recommendation.
  • Just get your money in - If you still can't decide, at least get your money in so you can get your tax receipt.  It's better to have it sit as cash in your RRSP account for a little while than to miss the deadline altogether. Simply mail us a check (or even drop by a ScotiaBank branch with your ScotiaMcLeod account number) and make your last minute contribution. Then take as much time as you need to decide how to invest your contribution.

Most importantly, we're here to make investing easier for you.  Use us.  Call us (416-863-7777) or email us - we're happy to make recommendations to suit your individual needs and goals. 

The Importance of Setting Goals & Sticking to Your Plan

A Personal Anecdote 

By Carl Spiess

Over the last few months, many clients have relayed to us how much happier they are with the returns in their investment accounts.  I'd like to share one such story with you.

Several years ago John and Jane (not their real names for privacy reasons) met with me to discuss their investments.  John had come to know us through his membership in the Group RRSP we run for his employer.  He and Jane approached us to help them develop a personalized plan for their entire portfolio - RRSPs and non-RRSP investments, as well. Their goal was stated simply: "We want to have $1 million in investments by the time John is 45."  I noted this objective on their client profile and it became our target for their portfolio. 

I made recommendations on investments, and also on the significant annual savings that would be needed to reach the goals.  We consolidated RRSPs that had been held elsewhere. Over the years, we met annually and topped up RRSPs, added trust accounts for the 3 kids, and also RESPs.  Monthly PAC plans were set up in the non-RRSP accounts, largely buying equity funds, while the RRSPs became more oriented to bonds. 

Our annual meeting in February 2003 was a tough one.  The markets had conspired against us.  The accounts had not grown through the 3 year bear market, and John was starting to feel like they were putting good money in after bad.  In fact, despite good growth in the late 1990s, the overall account value had stagnated at around $730,000 for 2 years, despite two years of annual contributions of around $50,000.  John was now 44 and Jane was starting to question if they had picked the right way to achieve their goals. 

I presented John with slides showing how the markets had recovered in the early 1970s, and several of the similarities to 2000-2003.  We reviewed the investments, made few minor changes, using the "age as a percentage in bonds" rule.  We did make the RRSPs a bit more conservative, reflecting that John and Jane were another year older, but kept the overall strategy.  He & Jane agreed to stay the course, and continued with the PAC plans. 

In September, I contacted John about his 45th birthday.  While we hadn't quite reached the goal of $1 million in investments, we were very close!  The 6 month rally from the March 2003 lows, had pushed the accounts to $940,000.  All we needed was another 7% growth over the next year, and the goal would still be met.  Early in the new year, I emailed to note that we were only 16k away from the goal.

Sure enough, on February 10th, 3 days prior to our annual review meeting, the accounts hit $1 million.  I sent a congratulatory email, and John called home to let Jane know they had reached their goal of $1 million.  They were pleased to have achieved their goal just a few months after John turned 45, in spite of the dismal returns of the market over the past few years.

What is next for John & Jane?  Getting the kids through school, and buying a cottage.  We will continue to pass milestones, and while they realize there will be ups and downs along the way, they know that if they stick to their plan, they'll achieve the next goals, too.

The moral of the story is a simple one.  Set a goal, seek help in how to achieve that goal, implement the strategy, monitor, and then stick with it.  We look forward to helping with your goals.  It is very rewarding for us to be a part of your success.

Be Careful Out There

A few weeks ago, the Ontario Securities Commission (OSC) announced that there are a number of disreputable telemarketers soliciting clients for "investment opportunities" - see Investor Alert. Remember, if it is too good to be true, it usually is. Money Sense posted an informative article on this issue: 

Deposit Insurance: What is Covered?

On the other hand, you also want to be careful about what you believe on TV...  

Recently, CDIC ran a series of ads reminding people that only term deposits at banks and trust companies are covered up to $60,000 in CDIC insurance.  Quite true, and thankfully they are, as there have been 43 failures among CDIC insured firms since CDIC was set up, thus protecting clients of those firms.  We offer CDIC insurance on the 7 GICs issuers from whom we shop rates, to ensure you get the best rate at the lowest risk.

However, CDIC's implication that investments that are not insured by them are somehow inferior is misleading.  Deposit-type investments require insurance because you do not purchase an asset when you invest.  You merely loan the financial institution money and they promise to pay it back.  You insist on CDIC insurance in case the bank defaults.  

Other investments are not covered by CDIC insurance, since they don't need to be. In the case of mutual funds (and individual stock & bonds) you actually own the underlying assets, regardless of whether it is held by a bank, brokerage, insurance company or mutual fund company.  For example, in a T-bill mutual fund, you actually own treasury bills with a government guarantee. Deposit insurance would be redundant.  

In an equity mutual fund, you own the underlying securities which will fluctuate in value. You are compensated for the risk associated with this investment by the potential for higher returns. You can insure against a fall in value in equity mutual funds through vehicles like GIFs (Guaranteed Investment Funds) but there are costs associated that reduce the potential for higher returns.  Whether that additional cost is warranted would depend on your personal situation.

So, what if the company that holds your investments for you goes under?  In the case of mutual funds, stock & bonds you still own the underlying asset you purchased.  What about cash balances deposited with institutions that are not covered by CDIC.  All brokerage firms, including ScotiaMcLeod, are covered by the Canadian Investor Protection Fund (CIPF) that insures un-invested cash balances at brokerage firms.  If a brokerage firm is unable to pay back a cash balance owed to you, CIPF will. 

In summary, it is important to know what is and is not protected by CDIC insurance.  However, with short term interest rates at their lowest in 40 years and the stock market gearing up again, the timing of the CDIC commercial would appear to be self-serving and possibly inappropriately targeted at people looking for long term growth.  As always, we advise our clients to select their investments based on the fundamentals of the security and the investment's appropriateness with respect to a sound financial plan.   

Fund News

VenGrowth Funds will close its popular VenGrowth II Fund Labour fund to new investors after this RRSP season. While the fund will be closed to new investors, those of you already invested in the fund will still be free to buy and sell shares, subject to your holding period restrictions under provincial tax regulations. Called "Capping" the fund, mutual fund companies sometimes close a fund they feel has reached the optimal size to be managed effectively. As they did when they closed VenGrowth I Fund, VenGrowth will be introducing a new fund, VenGrowth III Fund, with similar objectives for new investors.

Retrocom will be introducing a Retrocom Real Estate Investment Trust, to round out the investments it makes in real estate in its Labour Sponsored fund.

GrowthWorks WV Canadian Fund has added the ability for investors to invest a portion of their fund purchase in one of six non-venture investment options. 70% remains in venture capital investment in growth oriented Canadian firms, as before.  For the other 30%, you have the choice to direct your investment into one of six choices: Balanced, Growth, Income Trusts, Financial Sector, Resource Sector or Diversified. This could be a good choice for you if you would like the tax savings of a Labour Fund but the Labour fund would make up a large portion of your portfolio.  See the GrowthWorks website or call us for more information.

Mutual Fund Reporter Recommended Website of the Month 

The Ontario Securities Commission's Investor Education Fund website is a good source for objective investment advice. It has lots of tips for investors.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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