Managed Money Reporter Newsletter — Issue 257, June 2010

Editors: Carl Spiess & Allan McGlade

Featured Articles

Market Review

Carl Spiess

Recent volatility in the markets

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director, Wealth Management

The last several weeks have been quite a roller coaster, as the fluctuations and recoveries in the markets seem to be happening so often. We had the Greek debt crisis, and the "flash crash", the un-pegging of the Chinese currency, and are now digesting the G8/G20. But in general our phones have been quiet; it seems most clients have an appropriate level of risk in their portfolios. Here are some comments on each of these events.

The "flash crash" on May 6th saw markets drop and suddenly recover almost 10% of their value in under an hour. Closing market prices were significantly higher than their mid day lows. Here is the SEC's report:

and some of the finger pointing at ETFs from afterwards:

Interestingly, two weeks later, the markets were approaching the levels of the lows of the "flash crash", and have subsequently recovered again. Was the flash crash really just the markets being hyper efficient (predicting the future value two weeks in advance), or are the increasing number of "basket" securities like ETFs somehow to blame? We are watching this closely and certainly can expect more volatility in the future.

The larger issue is the debt crisis in Europe which is actually similar to the problem that we faced in Canada in the early 1990s. Fortunately, Canadians tightened their belts, got our spending under control, and dug out from the mountain of debt that we were suffocating under. And now Canada is sitting in an enviable position worldwide, with our governments and financial institutions the envy of the world heading into the G8/G20 meetings. Hopefully, the countries that are currently running unsustainable deficits will be able to learn from our experience. We are already seeing indications of belt tightening in Europe, in the most recent elections there. In the interim, it continues to make investing in Canada appear favourable compared to international investments, despite Canada making up only 3% of world stock markets.

What do all these macro-economic issues mean to you? They mean it is time for us to continue to review and possibly fine tune your portfolio.

We are finding that many clients who are retired or close to retirement are looking at moving to an investment that provides a stable income stream, that is guaranteed for life. Our article below features guaranteed annuities, which offer just that.

For our younger clients, investing regularly into market based portfolios still makes the most sense. We continue to favour "target date" lifecycle funds, which automatically become more conservative over time. Since we started recommending these funds in November 2005, the number of funds available has grown. In our next issue we will review the use of these funds in RESPs.

For most clients continuing with a balanced portfolio, with good, actively and professionally managed equities, and also a stable fixed income portion will find the right balance of risk and return for the long term. Please contact us if you have questions about your accounts or specific investments.

More on recent market volatility


Guaranteed Income For Life

Canadians today are enjoying a healthier and more active retirement than their parents’ generation. We are living longer than ever and, in some cases, may spend as much time in retirement as we did working. How you turn your savings into retirement income can have a significant impact on your retirement lifestyle. One of the biggest risks you’ll face during this stage of your life is longevity risk - the risk you’ll outlive your income.

What is the one kind of investment that can insure against longevity risk? A life annuity can help to lessen your longevity risk by providing a guaranteed source of income for life. This income can be used to meet expenses or provide a strong foundation for your portfolio, freeing up the balance to be invested in the most efficient manner.

An annuity is like a mortgage payment that works in reverse. Instead of borrowing money, you invest money with a financial institution and in exchange you receive regular income payments - payments that contain both interest and principal. But unlike a mortgage that would typically end after a specific period, payments from an annuity can be guaranteed for the rest of your life.

Beyond providing guaranteed income for you for the rest of your life (or for you and your spouse’s life) no matter how long you live, an annuity can also:

  • Protect you against fluctuations in the market - you'll always know what your income will be no matter what the markets do
  • Protect you against inflation - you can index your annuity so that your income increases each year by a set amount
  • Provide a guaranteed stream of income for:
    • You and your spouse - your income can be based on two people's lives to guarantee income for your spouse after you are gone
    • You and your beneficiaries - payment guarantees ensure a specific amount is paid to you or your beneficiaries, no matter what happens
  • Offer tax advantages - for non-registered funds, partial tax-deferral is available for your income.
  • For clients over 65, the interest portion of your annuity income will generally qualify for the Pension Income Amount Tax Credit.

There are several kinds of annuities available. A Single Life annuity provides income for as long as the annuitant is living. A Joint and Survivor Life annuity provides income for the lifetimes of two people. A Term Certain annuity provides income for a specified period. A return of principal (principal guaranteed) annuity can ensure that you or your heirs receive back at least as much as you initially invested.

Annuities can also be combined with life insurance to enhance your monthly retirement cash flow, while guaranteeing a specific benefit for your heirs. If you plan on making a donation to charity as a part of your will and estate plan, a charitable insured annuity presents significant tax savings and an enhanced yield.

For a personalize illustration on how much guaranteed income a portion of your current assets could provide you with, please contact us.

More on guaranteed income & annuities


All that Glitters...

The three charts, below, are interesting. Over the last 3 years, gold has been a great investment (chart 1), and we've all seen in the news how it is hitting record highs. But since the highs are in US$ and the US$ has been falling relative to the Cdn$, Canadian gold investors have seen little growth over the last year (chart 2). And over 15 years (chart 3), gold (again in Cdn$) had languished for a decade, before starting its run. Note that the second best performing asset class in the chart was Canadian Balanced Funds.

Chart 1 - Asset Returns over 3 Years Chart 2 - Asset Returns over Last Year Chart 3 - Asset Returns over 15 Years

So what to do if you are interested in owning gold? Scotiabank is a leader in offering gold bullion to Canadians, visit:

for information on how to directly purchase coins, bars, bullion or certificates.

A simpler way is to take advantage of the many asset backed Exchange Traded Funds (ETFs) that invest in gold. GLD is the largest gold ETF, but trades in US$, presenting a currency risk for Canadian investors. Canadian investors now have CGL a gold bullion ETF from Claymore that trades in Cdn$.

New mutual funds from Mackenzie, Sprott and BMG offer a number of options, with no fees to buy and sell or bid ask spread. Here is a list of gold funds available through ScotiaMcLeod:

Investors will also want to be careful to ensure that any gold funds purchased actually hold physical unallocated gold. It is important to note that in general there is a cost to any fund that holds gold, and they will lag the spot gold index over time. Similarly, individual investors holding gold will have to have a safety deposit box, and face fees for buying and selling, that are material to the eventual return.

Gold is actually now an eligible investment in RRSPs, and we are pleased to let you know that while your existing equity holdings likely give you enough exposure, we can help review the pros and cons of the various approaches to adding gold to your holdings. We will note that most Canadian equity funds will hold gold mining stocks like Barrick or Goldcorp. Also, there are a number of Precious Metals funds that have all outperformed gold over the last 15 years. But please, let's be careful about buying into a sector at record highs after a 10 year bull run.

As always, we encourage you to contact us if you have questions about gold or any other investments and how they might fit with your overall investment strategy.

More on gold


ETF Dividend Re-investment

Notwithstanding the caveats about Exchange Traded Funds in our lead article, we are pleased to announce that all ETFs at ScotiaMcLeod are now eligible for dividend re-investment. This avoids a major drawback of ETFs, which was that the cash distributions sat and didn't continue compounding. Please contact us to set this up in your account or if you have questions or see our ETF page:


Canada Pension Plan

Canadians rely on the Canada Pension Plan (CPP) to help with a portion of their retirement income. Presently, 65% of CPP retirees commence pension at age 60 to 64, 31% start pensions at age 65 and only 4% postpone CPP pension commencement until after age 65.

Until recently, the rules for retiring were fairly straightforward. Full CPP is paid at age 65, with a .5% a month reduction or increase for every month that you advance or delay your first payments.

Factors no longer reflect life expectancy

Proposed changes to the CPP will make things more complicated but fairer. One of the many changes to CPP is that there will no longer be a 2 month work cessation test, allowing people to continue working, and still begin receiving CPP payments. That will simplify matters for people reviewing their options. Because the changes are so numerous, we have attached a full presentation on the topic.

We are here to help you make sense of this in the larger framework of your retirement planning and would be pleased to review your personal retirement income projections and help explain what the changes mean to you.

More on proposed changes


Team News

We are pleased to announce that Natasha Ramcharitar has joined our team full time as an Administrative Support Assistant. Natasha helps prepare many of the performance and investment reports for our regular client review meetings. Please feel free to contact Natasha directly at 416.945.4929 if you would like to schedule a portfolio review with one of our advisors.

Carl Spiess will be celebrating his 20th anniversary with ScotiaMcLeod this fall. Over the coming school year, Carl will be heading off on a 1 year French immersion sabbatical with his family, returning in August 2011. To ensure continued service to all our valued clients, Allan and Andrew will be taking over Carl's primary daily client contact responsibilities during his leave. If you would like to meet or speak directly with Carl prior to his departure, please call 416-863-7777 to set up a time for a meeting in July.


Recommended Link of the Month

It seems a lot of people are curious about whether they are keeping up with the Joneses. (Or how their portfolio is doing compared to the Dow Joneses?) doing. If you are interested in seeing how your wealth stacks up to other Canadians, please visit the statistics Canada site, which has a wealth of information. (Ok, too many puns?).

"The Wealth of Canadians: An Overview" publication, shows that the median family's net worth was $146,000 in 2005. Canadians typically had $13 in debts for every $100 in assets. Not surprisingly, younger families with children had the largest debt loads. For more information, see the complete report at:



Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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