Managed Money Reporter Newsletter — Issue 234, January 2007
Editors: Carl Spiess & Allan McGlade
By Carl Spiess, CFP, FMA, MBA, Director
This month, our biggest newsletter ever will cover RRSPs. How much to contribute, what to invest in, how recommended funds have done, foreign investing, ethical investing, life-cycle funds, spousal RRSPs and more. Research has shown that Canadians spend more time researching a new TV purchase than they do on their annual RRSP contribution. So take a few minutes, grab a coffee, and read our advice on RRSPs for this year ...
First, let us start with some statistics. Only 7% of RRSP room ever earned by Canadians has actually been used for retirement savings. And each year, less than 40% of Canadians who have earned RRSP room in the previous year make any contribution at all. At least among those making over $80,000, 76% make an RRSP contribution. We encourage anyone with income over $30,000 a year, to scrimp, save, or even borrow (with Scotiabank RRSP loans at Prime) to make a RRSP contribution, with 10% of income as your goal. We have even included a handy RRSP order sheet for you so you can get your RRSP contribution to us by March 1st. To know how much to contribute, simply look at your last "notice of assessment" from CRA. The maximum contribution limit, based on income, has been increased to $18,000 for the 2006 tax year so you will probably have some room.
One last reason to motivate you to contribute to your RRSP this year. The average life expectancy in Canada is now over 80 years of age. While this is great news and reinforces the great progress society is making, it does mean we all need to keep saving a bit more for the future.
Ok, so you are ready to make a RRSP contribution. Where should you invest it? Well first, you don't need to make a decision yet. We have a number of short term funds and cashable Guaranteed Investment Certificates (GICS) paying 3.85% that we can park the money in, and wait until we have time to chat and review your account. Or you can add to an existing holding in your account or review our recommended list and make a new selection.
The performance of the funds on our recommended list has been nothing short of spectacular in the last 12 months. Frankly, the returns of the last few years are not likely to be repeated in the near future.
We have long advocated a balanced investment approach, with a core bond component and the growth portion of the portfolio equally split between Canadian and International equities (stocks). Over the last 4 years, foreign markets have lagged Canada due to the rising dollar, and many investors have been reluctant to look at international investing.
A cautionary article from AIM Trimark (see links, below) about our resource rich market in Canada, along with recently increasing performance of international funds, may convince some to rebalance again. If you have any questions about your overall account balance or diversification, please ask us.
Well, it has been just over a year since Lifecycle funds burst onto the scene in Canada. Lifecycle funds are essentially one decision balanced investment portfolios that begin with a strong growth bias, and become more conservative as they approach their maturity date, which is usually selected to match your retirement date.
Last year, we wrote that we really liked the concept and, with the history of success that these funds have had in the US and abroad, they would likely find favour in Canada. Indeed over a billion dollars has moved into these funds in the last year and more companies are offering them. Scotia and Fidelity are the market share leaders, with solid performance, and the much smaller funds offered by the Ethical family of funds have been surprise performers. The guaranteed funds offered by Clarington have been the performance laggards, but if you want a guarantee, you would expect to pay a little more for that!
A convenient investment truth?
We have had research on our site for many years about ethical investing. Two items make me want to write more about ethical investing this RRSP season. First, the strong performance of Ethical Funds' "Advantage" series of Lifecycle funds (as discussed in the previous article, above) makes another recommendation of ethical investing a worthwhile consideration. Second, like many other people, I am concerned about climate change and wondered what more I can do beyond installing a few compact fluorescent bulbs. Here are some ideas:
You can feel good about what you own. Ask us for suggestions if you want to include more of this kind of investment in your portfolio.
Please see our labour sponsored fund page to see if the up to $1,750 tax credit is worth looking at making an investment that creates jobs and may also benefit the environment.
There was a major departure from Fidelity funds in December. Alan Radlo, long-time manager of various Fidelity funds, and most recently co-manager of Fidelity NorthStar fund, has left the organization. We liked Alan and his style which was always quite defensive, however the new managers on the funds he was involved in draw on Fidelity's extremely deep bench strength. We are not recommending any changes at this time, but will of course be watching the new managers and their performance.
Two funds that we had put on performance watches due to their high volatility (and underperformance a few years ago) have rebounded quite significantly. AIC Advantage Fund (which many critics were deriding in 2003 when the share price was around $50) has recently rebounded to above $100. Similarly, Templeton International Stock Fund has recently had a surge of performance.
While not on our performance watch, Templeton Growth fund had a manager change six months ago and we have been keeping an eye on the fund. It however, seems to be continuing its 50 year record of consistent growth.
Remember, while viewing the performance data, you can click on the fund name to see even more details on the fund.
We have attached an article from AIM Trimark on the new rules about income splitting. It suggests that even with the pending changes which allow spouses to split retirement pension income including RRSP/RRIF income after age 65, spousal RRSPs will still make sense. Spousal RRSPs will still allow income splitting prior to age 65, RRSP contributions for individuals over 69 (who have a younger spouse) and greater homebuyer's withdrawal options.
One last bit of fund news: Scotia Mutual Funds will be revising its fund lineup slightly, eliminating the Scotia Young Investors Fund and changing managers on several other funds, replacing Capital International Group with other managers.
Statistics Canada has an excellent daily newsletter that is worth a look:
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