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Newsletter Archive

Investing for the Future
September 2003

 The punishing markets of recent times are causing many investors to take a more cautious approach to their investment strategy.

Investments 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 growth.

Diversify

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.

Monitor the Market

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.

Consider Government Incentives

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.

Consider Leveraging Assets

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 time horizons.

Get Professional Advice

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.