Have questions about investment strategies? Maybe you'll find the answers here!
Below are the some of the questions (classified according to subject) submitted by visitors to our site, as well as our experts' replies.
How Should I Invest My Money?
I'm planning to go on a trip, probably 6-7 months from now. At the moment, I've got $2,000 I'd like to invest before I buy my tickets. Since I was planning on traveling stand-by, I don't need the money before then. What would be the best savings vehicle for me?
The type of investment you pick will depend on several factors, including the investment term and level of risk you are comfortable with.
In this case, the investment term is very short, under 12 months. Also, you probably want to protect your capital ($2,000) and make sure it doesn't diminish. The safest investments would therefore be guaranteed investment certificates (6-month term) or a money market fund. They would help you earn money on your savings up until you are ready to go on your trip.
I have several mutual accounts with varying degrees of risk and performance. I only have five more years before I retire. Would it be in my best interest now to invest in more secure investments such as savings bonds or GICs? My husband has a pension plan and I have my own business. Hopefully, we wouldn't be drawing on our RRSP investments until our mid-60s (about eight to 13 years from now). Obviously, the last statement depends on how well we pare down our lifestyle once retired. Any ideas are welcome. Thank you.
Investment strategies depend on your objectives and risk tolerance.
While it's true that, as your date of retirement approaches, you should aim for less risky investments, an eight-to-13 year timeline is still relatively long.
Your lifestyle objectives also need to be considered. If a return of 4% is enough to provide you with the lifestyle you want in the long run, then GICs are good. If you need a return of 8% to meet your objectives, and can absorb short-term fluctuations without this affecting your lifestyle, you may want to invest some of your money in mutual funds.
Desjardins Financial Security offers you the opportunity to invest in Guaranteed Investment Funds, which combine solid growth potential with guarantees that protect your deposits against market downturns. To learn more, consult the Helios Guaranteed Investment Funds section of our website.
You may want to contact one of the financial advisors from our Desjardins Financial Security Independent Network. They have the knowledge and software to make forecasts and determine the program best suited to your needs.
Since rates are really low right now, what's the best investment I can make apart from RRSPs? I'm retired and don't want to lock in my money for several years, since I don't know when I going to need it. Thank you!
As a general rule, the higher the return on an investment, the greater the risk. Since you're now retired, you need cash on hand; preservation of capital is certainly preferable to looking for better rates.
However, without locking in all of your money, asset allocation could be advantageous. In fact, for all types of investments, there are three factors that should be kept in mind: risk, return and volatility.
By combining various investments (funds, guaranteed investment certificates, annuities, etc.) in accordance with these factors and your financial needs, asset allocation will let you strike the best compromise possible without having to lock in all your money, by minimizing risk and improving returns while respecting your cash-flow needs.
In addition, starting in 2009, you will be able to contribute up to $5,000 per year to a Tax-Free Savings Account. Contributions will not be tax-deductible; however, the investment income will not be taxed and tax-free withdrawals can be made at any time. It's a great way to grow your savings.
For help in this matter, contact one of the financial advisors from our Desjardins Financial Security Independent Network.
Is it a good idea to borrow money for an RRSP when I have credit card debt (I owe around $10,000)? I'm self-employed and have an annual net income of around $65,000. I've pre-paid $15,000 for this year's income taxes. Would borrowing to invest in RRSPs reduce my income tax?
Thank you!
Credit card interest rates are so high that I would do everything in my power to repay that debt. You may want to consider a personal loan with a caisse or a bank, since interest rates are lower.
RRSP loan programs are worth checking into, since interest rates are very low and you can use your tax refund to help repay your debt (usually within a year).
Contact one of our Desjardins Financial Security Independent Network associates for assistance with financial planning.
My wife and I are both retired and in our early 60s. We don't have ANY bills. The house and three vehicles are all paid for. Our retirement income is approx. $70,000 year. We currently have about $50,000 in CDs and $40,000 in IRAs, as well as $20,000 in cash. Another $20,000 is owed to us by our children (THEY ARE PAYING US BACK MONTHLY WITH INTEREST...) Our four grandchildren have their college education paid for already. Oh...we also have $15,000 in a tax-free bond fund (my wife bought it). We've saved approx. $20,000 each year since retirement. Question: How should we invest so our savings can accrue at a better rate than 3% or 4%?
Establishing a portfolio is a compromise between risk and return. You've indicated that you'd like to achieve a higher return on your portfolio than the 3% or 4% GIC rates now offered by most financial institutions. In order to increase your potential return, you'll most likely have to invest in riskier vehicles, such as mutual funds or individual stocks and bonds.
It's worth noting that a special type of investment offered by Desjardins Financial Security might be appropriate for you. Guaranteed Investment Funds combine growth potential and Guarantees that protect your deposits against market downturns. For more information, visit the Helios Guaranteed Investment Funds section of our website.
You should also consider the following two basic principles of investing:
- Portfolio diversification: diversifying your investment options in order to reduce risk and maximize return;
- Dollar-cost averaging: regularly investing small amounts rather than one big chunk at a time.
In order to assess what rate of return you should aim for and how much risk you can tolerate, we suggest a careful analysis of the following key factors:
- Objectives: quantify your financial goals (e.g., leave an estate of $XX, buy a boat in three years, etc.);
- Limitations: identify your financial and personal obligations (e.g., cover living expenses, pay taxes, settle health bills, pay for dependants).
In addition, a new Tax-Free Savings Account has been introduced by the Federal government, to take effect in 2009. You and your spouse will each be able to contribute up to $5,000 per year. And while contributions are not tax deductible, investment income is not taxed and you can make tax-free withdrawals at any time. It's a great way to grow your savings!
For a complete review of your financial/personal situation and more details about Millennia III Segregated Funds, we recommend you meet with contact one of the financial advisors from our Desjardins Financial Security Independent Network.
How to Save for Retirement
How do I plan for my retirement if I can currently afford to put away between $1,000 and $1,500 a year?
It's difficult for most of us to plan and save. How can we tell what the future holds, or how much we'll need to live on? The lifestyle you want for your "golden years" determines the amount you'll have to put away. Usually, the goal for retirement is to maintain between 60% and 80% of the purchasing power of your current income.
How do you do this? First, don't worry. Your retirement income can come from various sources, such as a pension plan from work, government pension plans, and your own savings.
The government and your employer (if applicable) will provide some retirement income, but it may not be enough. That's why you have to do your part. You can set up your own retirement savings program through individual plans or accounts.
To set up an effective investment and savings strategy, you have to get a realistic idea of your financial situation. What are your monthly expenses, and how much do you currently have put by? How much do you plan to withdraw from your sources of income at retirement? How much should you save in the meantime to have enough at retirement? Below are a few helpful strategies in this regard.
Start investing early in life: Time is the best way to make an investment appreciate in value. The sooner you start, the longer your money has to grow. This will increase your chances of reaching your retirement-investment goals. Here is an example illustrating this principle:
Joanne, who started investing in an RRSP at age 30, invests $1,500 a year in a plan with a 6% annual rate of return. By age 60, she'll have put away $45,000, and her plan will be worth $125,702.52.
However, Jack waited until age 40 to start contributing to an RRSP. To make up for lost time, he puts $3,000 a year away into a plan with a 6% annual rate of return. At age 60, he will have put away $60,000 into the plan, but it will be worth only $116,978.18.
At retirement, the value of Joanne's plan is higher than Jack's, even though she contributed $15,000 less, for the simple reason that she started contributing to her RRSP sooner.
Invest regularly: Developing a profitable financial strategy requires planning and discipline. One of the best and least painful ways of doing this is to put aside a percentage of your income each month, thereby gradually building up your retirement capital.
I've Just Left My Job. What Will Happen to My Pension Plan?
I've just left my job, and have two pension-plan options: to transfer $46,000 into a LIRA, or to have an annuity of about $5,500 deferred to normal retirement age. I'm not sure whether to establish a portfolio including stocks, bonds, indexed investments, investment funds, etc. or to transfer my annuity to my next employer. Do you think a custom-designed portfolio will provide enough growth to enable me to retire more comfortably in 25 years than a defined benefit pension plan?
Your decision to hold on to an annuity payable when you retire or transfer the funds into a locked-in retirement account (LIRA) depends on many factors, including your risk-tolerance level and investment horizon.
If you opt for the annuity, your former employer will assume all investment risks involved. Regardless of market performance, you can rest easy: you'll be paid the promised pension when you retire. To calculate this kind of annuity, actuaries are currently using long-term rates of return of about 6%. If your plan is indexed and you foresee significant interest-rate hikes, you may want to protect your purchasing power.
If you decide on a LIRA, you must feel sure of getting a return (net of fees) of at least 6% upon retirement, and be able not to lose sleep over return fluctuations.
The more distant your investment horizon (the farther away you are from retirement), the greater your ability to invest in risky vehicles such as a LIRA.
While these are all factors that can influence your decision, your final choice will be determined by your profile.
If you wish to purchase a LIRA or discuss your options further, contact a financial security advisor assigned to your Desjardins caisse or a Desjardins Financial Security Independent Network.
My spouse and I would like to buy a house within the next two years, but we don't have any money saved up and we're not sure exactly how to go about it. Should we start contributing to an RRSP? What should we do? We are 22 and 25 years old and we don't know very much about this subject.
I suggest you consult the sections entitled "My Life is Changing" and "I Need Advice Tailored to My Situation" on Desjardins Financial Security's Web site.
You will find a wealth of information to help you make decisions, including a section that deals specifically with the purchase of a first home.
You might also want to consult the Home Buyers' Plan section, where you will find a wealth of useful information.
Finally, I'd like to draw your attention to the Federal government's plan to introduce a new Tax-Free Savings Account, effective in 2009. You and your spouse will each be able to contribute up to $5,000 per year to this account. And while contributions are not tax-deductible, investment income is not taxed and you can make tax-free withdrawals at any time. It's a great way to grow your savings!
RRSP Investment Strategies
What's the ideal investment strategy for my RRSP?
You must take many factors into account when determining the best strategy for your RRSP portfolio. First of all, you must determine your objectives and limitations; your short, medium and long-term investment horizons; your risk tolerance level; your ability to save; market trends; etc. All these factors will help you develop an investment plan that's tailor-made for you.
There are, however, certain general rules that apply to everyone: It's important to start contributing at an early age and at the beginning of the year, to make regular contributions, to diversify your investments, and to consider your risk-tolerance level.
From a taxation standpoint, you should favor investments that generate capital gains and dividends for that portion of your portfolio not invested in RRSPs, and investments that earn interest for your RRSP portfolio.
Why should my RRSP have foreign content?
Investments in foreign corporations give you a chance to take advantage of economic growth in other countries, thus diversifying your portfolio and reducing the attendant risks.
Is there a foreign content limit to my RRSP?
In its 2005 budget, the federal government eliminated the foreign-content limit for RRSPs. However, before increasing the number of foreign shares in your RRSP portfolio, make sure you're comfortable with the risks posed by these investments (which include the exchange-rate risk).
Hello. I currently have two RRSPs with different banks. I started them when I was 20 and didn't know too much about them. Should I just put them into one bank? I guess there's no point splitting them up. I also want to know which RRSP is best for me at my age (24). I currently have GIC RRSPs, and have been told they're not right for me. Given that I'm still young, I should probably have a higher-risk RRSP so I can make more money from it.
Some investors with a lot of money will decide to split their investments among several financial institutions, as the maximum deposit insured in the event of a financial institution's insolvency is $100,000. Others opt to consolidate their investments in order to save on fees.
The type of investment you should make depends on a number of factors. One is your objectives and horizon. If you're saving for retirement (which is usually the case with RRSPs), your horizon is long, since that event may be more than 30 years away. In this case, you can afford to invest in riskier assets such as stocks, mutual funds, etc.
Your risk tolerance is also a factor. Are you able to take the daily fluctuations in the value of your assets in stride? One alternative to mutual funds could be segregated funds, which offer capital guarantees and the possibility of investing in the stock market.
A good technique is also to diversify investments among various instruments-stocks, bonds, GICs, etc.
A financial advisor can help you determine the strategy and savings rate that will enable you to meet your financial objectives. Contact one of the financial advisors from our Desjardins Financial Security Independent Network.
Instead of investing in mutual funds for my RRSP, can I invest my money by lending it out for mortgages/second mortgages? I want to treat it as an RRSP and have it registered. Is this at all possible? If so, what's the procedure and who do I see about this? Should I go through a lawyer? A financial advisor? What license is required?
Please let me know as much about this as possible. Your help would be greatly appreciated. Thanks.
Mortgages are RRSP-eligible investments. Assuming you're referring to an RRSP mortgage, this is a strategy that enables you to lend money to yourself, as opposed to a third party, to finance the purchase of a house by using the funds in your RRSP, which is not the same as the Home Buyer's Plan.
To set up an RRSP mortgage, you must have a self-directed RRSP that meets the requirements of the Income Tax Act.
The definitions of "qualified investment" are given in section 204 and in subsections 146(1), 146.1(1) and 146.3(1) of the Income Tax Act (and Parts XLIX and LI of the Income Tax Regulations).
I also suggest you read Bulletin IT-320R3 on the Canada Customs and Revenue Agency's Web site.
It's important to realize that there are restrictions and numerous fees to pay with this type of investment, and that there might be complications.
For more information and advice, you can also consult a trust company.
Can I use my self-administered RRSP to give my mother a second mortgage?
A mortgage on a building in Canada is a qualified investment with respect to self-administered RRSPs. While such a mortgage doesn't necessarily have to be a first mortgage or apply to a home, if the parties in question are related (as is the case with a parent and child), it does have to be administered by an approved lender as defined by the National Housing Act and be insured under the Act by a company offering services to the public as an approved mortgage insurer. Lastly, it must be administered as though granted to a stranger-i.e., the loan interest rate and other terms and conditions must reflect current business practices.
For any questions, please contact a trust company
I own a few securities (stocks, bonds, etc.) that aren't in an RRSP. If I decide to transfer them to my RRSP, which amount is used for transfer purposes, the market value or the purchase price?
There may be a number of good reasons to transfer securities you hold personally, including the following:
- Earn income and realize gains inside your RRSP in order to defer taxation
- Protect your securities in the event of bankruptcy by holding them in a creditor-proof RRSP
- Earn a tax deduction by making an RRSP contribution
You can transfer investments such as Canada Savings Bonds, Treasury bills, marketable bonds, preferred shares, and convertible debentures into your RRSP. The transfer value will be based on the fair market value at the time of transfer. As any securities held will also be deemed sold to your RRSP, the gains accumulated at the date of transfer will be deemed realized, and added to your total income for the year of transfer.
On the other hand, if your securities have decreased in value at the time of transfer, you will realize a loss that cannot be deducted from your capital gains.
Accordingly, it's better to transfer securities with little or no accumulated gains (or liquidate any depreciated securities) so as to make a capital gain, and invest the proceeds from this sale in your RRSP.
I'm 71 and have to convert my RRSP into a RRIF or life annuity. What should I do?
A life annuity guarantees income for life. Furthermore, monthly benefits will be greater if you buy the annuity when interest rates are high. With a RRIF, you have access to a variety of investment options that can provide better returns, but at a greater risk than a life annuity, including that of having your savings depleted before you die. You can choose a combination of both products in order to combine the reliability of an annuity with the flexibility of a RRIF.