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Rebalancing Your Portfolio

Recent market ups and downs have been difficult for many investors. The good news is, that it may have created for you one of the best tax planning opportunities for this year. 

I am referring to a strategy called portfolio re-balancing. It involves a review of  your portfolio for the gainers and losers, then triggering capital losses to offset any potential capital gains.

You can trigger a gain or loss by simply switching from one investment into another and remember Capital Gains can come to you as Mutual Fund distributions, not only when you sell the investment.

 A re-balancing of your overall asset mix is necessary after periods of strong bull markets, like we have seen over the past few years.

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Reducing Your Taxable Income and SWP

One of the most important financial goals I often hear from investors, is How do I Reduce my Taxable Income?

Well, you can begin reducing your taxable income and your tax bill, if you start with a review of where your income is coming from.

The overlooked area here is investment income, especially Interest from GICs and Bonds. Interest is the most highly taxed form of income so consider tax efficient forms of income such as Dividends, Capital Gains and Return of Principal.

One proven solution which combines all of these is a Systematic Withdrawal Plan.

For my clients, this program continues to provide a fixed regular income in a tax preferred manner. It is easy to put in place and very flexible.

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Estate Preservation

You’ve worked all your life to accumulate it, you’ve invested wisely to grow it and then along comes the major destroyer of your estate; Taxes. Upon your passing, taxes are triggered from all your financial assets.

You can plan for this tax obligation in four ways: 

  • Selling your estate

  • Taking a loan

  • Creating a Sinking fund

  • Estate Preservation 

One cost effective solution for Estate Preservation is the use of Section 148 of the income tax act. This allows you to accumulate financial assets in a tax deferred manner and then pass it to your estate tax-free, upon death. This strategy is commonly used in conjunction with all other aspects of your estate plans.   

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Choosing the Right Investment Strategy

When it comes to choosing the right investment strategy, here are the four most important things the right strategy must be able to do for you:

  • Meet with your objectives for financial planning

  • Manage within your tolerance for risk

  • Meet with your expectations for results and service

  • Allow you, your family and your advisor to sleep nights

Your strategy must integrate tax, investment and estate planning goals into a comprehensive approach. Since planning is an evolving process, it is equally important that your plans are monitored by your advisor on an on-going basis. 

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Segregated Funds

Canadian investors wanted it and the industry created it; Mutual Funds with a guarantee. The new segregated funds have resulted from a marriage of mutual fund managers to life insurance companies.

The big thrill; they can deliver up to 100% principal guarantee, for business owners they are marketed as creditor-proof and the proceeds of a Seg. Fund pass directly to the named beneficiary and are not subject to probate. 

The cost for all; higher management fees! 

Is it worth it? Here's what I think. If after 10 years of investing, you only receive a return of principal; even with modest inflation, you will still lose purchasing power.

With that being said, paying the premium may well be worth it if having the guarantee gives you the confidence to choose this investment as an alternative to a low paying GIC.

There are many Segregated fund possibilities. To explore your options, you can call me at 1-800-266-6963.

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The New RESPs

The new Registered Education Savings Plan or RESP, is to be warmly embraced; like the kids and grandkids who will reap the benefits.

Why? For starters, the government will give you annually, per child, 20% of your $2,000 contribution. That's up to $400 of annual bonus into the child's program, each year.

If you and the government did that for fifteen years, your young scholar will be off to University with $ 77,000. What a great start!

Now that RESPs are being offered by leading mutual fund companies, your investment will benefit from professional management.

Finally, RESP proceeds may be rolled into your RRSP, if all your young ones opt out of a formal education.

Although there are the usual rules and regulations that govern the program, these are three great reasons for you to give this program some serious attention.

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Asset Allocation

Is there a magic to overall investment returns over the long term?

A landmark study published in Financial Analysts Journal showed that 94% of your overall investment return was driven by Asset Allocation.

Asset Allocation, in simple terms, is the blend of stocks, bonds, GICs and cash that your portfolio consists of.

Seemingly simple to explain, it is highly complex to develop and manage. Asset allocation requires teams of technical experts with sophisticated computer models. But basically, Asset Allocation will fall into one of three approaches i.e. tactical, strategic or dynamic, each with an art and science on to its own.

As an investor, what is important to know, is that some well thought out method of Asset Allocation is being applied to your investment program by your advisor.

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On Doing It Yourself

In a recent interview for Investment Television, I was asked to comment on the rapid growth of Internet based investing, and here's what I think investors must be aware of:

Internet based investing is exciting and new and may work for the early phases of investing for younger investors. I see three significant drawbacks with Internet based investing which could negatively impact your long term results however:

  • Loss of objectivity - with the click of a mouse your wealth accumulation is gone

  • Next, the challenge of achieving consistent results, throughout an investment lifetime. Only professional investment managers have been known to have accomplished this goal

  • And most importantly, for people who have accumulated financial assets, Internet based investment may lack in strategies for complete and integrated wealth management that you will require

With the do-it-yourself Internet based approach, investors will miss out on strategies for tax efficient investing, reducing taxable income and preserving your estate, to name a few.

So, given the number of seasoned investors I have seen who have, as they would say, "been there done that", it confirms that Internet based investing is not for everyone! With a proactive advisor on your team, you will benefit from fresh ideas as your needs change throughout your investing life.

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March - Tax Savings

It's that time of year again, filing your annual tax return. Since we would rather be planning for the garden than filing our taxes, this year think of your tax return much like a garden; you can reap wonderful results, if you plan ahead.

The most common tax planning mistake is that you save taxes when completing your tax return. At tax filing time, the deed is done, you are simply filling in the boxes to reflect what has occurred during the past year.

For example, let's take investment income. This can be interest, capital gains or dividends; each of which is taxed at a different rate, interest income being the most heavily taxed. So had you planned your investments during year to yield more dividends or capital gains, the bottom line on this year's return would likely have shown more dollars in your pocket.

For this year, take your most important tax savings step; have your last year's tax return reviewed by your advisor for potential tax savings opportunities for the year ahead. Do it now, so you can improve the bottom line of your next tax return and remember, the key to tax savings is planning ahead!

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March 2000 - Foreign Content Increase

The recent budget announced an Increase in the amount of foreign investment allowed in your Registered Investment plans. This has increased from 20 to 25% and moving up to 30% next year. This is great news not just for those with Registered Savings Plans or RSPs, it is also great for those who are at the income phase, using a Registered Income Plan or RIF. Your Registered Income Fund, like an RSP can also participate in foreign investing.

With GIC rates at historical lows, retired investors must seek alternate investment options to reduce the risk of falling short of capital in later retirement years. The increase in foreign content to 25% will allow your plans to incorporate more foreign investments to give you that much needed continued growth.

Since Canada is one of the world's smallest investment markets, any well balanced investment portfolio must participate in large foreign markets, such as the US or Europe. In fact, if you want large, blue chip investing, you must seek foreign markets because the world's largest banks, largest insurance companies and car makers are located across the ocean!

It has become conventional investment planning wisdom that portfolio of 35% foreign investment can actually minimize volatility and increase returns. And remember, for true Blue Chip investing, you must include foreign.

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Copyright © Dixie Allen, 895 Don Mills Road, Two Morneau Sobeco Centre, Suite 108, Don Mills, ON  M3C 1W3