for the Future
The punishing markets of recent times are causing many investors to take a more cautious approach to their investment strategy.
always involve risk. As an investor, you need to have a risk management
plan in place to minimize losses when markets drop for extended periods
of time. Solid research, a well thought-out plan and professional advice
will help temper the risk to your principal so you can weather today’s
challenging market conditions and maximize the potential for long-term
Diversify your investments to
spread the risk. Do not hang on too long to a losing investment. It is
never easy to crystallize losses but sometimes rebalancing your
portfolio may be the wisest thing to do. Your chartered accountant can
assist you in weighing any tax advantages of realizing capital losses on
investments that are outside of an RRSP.
Find out everything you can
about the market, tax incentives, and the investment vehicle itself.
Poor investment decisions happen when investors react too quickly on the
promise of future profits without careful research. Others result from
indecisiveness when investors fear the risks and make no changes in
their investment strategies.
A dramatic example of the need
to understand the market was the downfall of the Internet companies.
Billions of dollars were lost because investors recognized too late that
there were far too many Internet companies chasing a market that would
not be sustainable. Changing needs, political pressures, demographic
shifts, technology, climate changes and catastrophes all have an impact
on market behaviour.
When considering equity
investments, look at the company’s technology, any contingent
liabilities, forecasts, capital asset base, management team, controlling
ownership and outstanding shares. Be wary of factors such as overly
optimistic forecasts and under funded pension plans due to over
expectations of market returns. In addition to discussing your
investments with your advisers, browse the Websites of these companies,
subscribe to quality investment publications or join an investment club.
The government often directs
investment dollars with incentives in areas such as regional employment,
research and development, and corporate/individual income tax. Whether
you are considering domestic or foreign investments, reduce your risk by
understanding these incentives before you invest. A quality long-term
investment should provide an adequate return without its requiring a
long-term dependency on government incentives or tax breaks. Your
chartered accountant can assist you in understanding the impact of
various tax incentives such as any tax credits that may be available.
While rates of returns on
investments are at an all time low for both equity and income-generating
investments such as bonds or GICs, interest rates for borrowing are also
at an all time low. Now may be a good time to consider leveraging your
assets to increase your investment portfolio before the next big
upswing. With appropriate financial and tax planning, borrowing money to
invest may make good sense.
One strategy is to leverage the
equity you have built up in your home by using it as collateral to take
out a loan or line of credit for long-term investment purposes. Because
you are borrowing for investment purposes, the interest on the loan may
be tax deductible provided the investment is outside of your RRSP
portfolio. You cannot deduct the interest for loans to invest within
your RRSP portfolio. However, contributions to an RRSP that you make
early in the year will accrue tax-deferred earnings in your RRSP over a
longer period as well as provide tax savings when you file your 2003
personal income tax return next year.
Of course before you leverage
assets for investing, you should talk to your financial advisor. As the
current interest rates may be short-term, you need to ensure you will be
able to service the loan if the investment does not deliver the expected
returns. You should have a cash reserve or alternate means of financing
if you need to ride out an increase in interest rates.
Before borrowing, carefully
assess your current debt management, ways you can control monthly
expenses, and tax saving strategies that could improve your cash flow.
Consider your comfort level, risk tolerance, and most important, your
Talk to your broker, financial
planner and chartered accountant about the investments you are
considering. Keep in mind that the profits that you make on your
investments are subject to different tax treatments depending on the
type of income that you receive from the particular investment and
whether the investment is inside or outside of an RRSP.
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