Thursday, October 30, 2008

Creditor protection of RRSPs

New federal law protects your RRSPs in the case of bankruptcy

Greetings!

Clients may sometimes wonder what would happen to their RRSPs, RRIFs and other registered plans should they face creditors that are coming after assets. Let me give you a brief summary of the pertinent information [with thanks to Frank Di Pietro, Mackenzie Financial's director of tax and estate planning].

Until recently, there were no laws in Alberta to ensure that registered plans received creditor protection. Effective July 7, 2008, creditor protection is now universally available in all provinces for a bankrupt person's assets held in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or a Deferred Profit Sharing Plan (DPSP).

Note that an individual would have to formally apply for bankruptcy for the protection to apply.

The new law includes a clawback period, which means creditors may still attack and successfully seize any property contributed to an RRSP, RRIF or DPSP within the 12 months preceding the date of bankruptcy. A trustee can also seize a registered plan in bankruptcy within five years of a transfer to the plan, if the client was insolvent at the time of the transfer. Therefore, any attempt to transfer property into a registered plan in anticipation of entering bankruptcy will not provide your clients with protection.

Creditor protection has always applied to Locked-in plans, including the property in LIRAs, LIFs, and LRIFs, since these enjoy the same creditor protection as Registered Pension Plans under their respective provincial and territorial pension legislation.

If you have any questions, please let me know.

Cheers!

Tom

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
#600, 1414-8th Street SW
Calgary, AB T2R 1J6
TEL 403.229.0128
FAX 1.866.386.9776

Tuesday, October 28, 2008

The forgotten element in financial planning

Greetings!

I'm going to call this newsletter "Tom versus the stock markets." I will keep this brief because I have written a lot about the stock markets recently. And then I'm going to finish with something much more important.

As a broad measure of how my clients' portfolios are doing, I track the total dollars that I manage for all me clients. With the recent market drop, I want to compare this total to what the stock markets have been doing. I have numbers for the period September 9, 2008 to October 24, 2008. For this period--

--the total dollars that I manage for all my clients has declined 15%

--the stock markets in Toronto and New York are down, on average, 26%

I believe that my "cushioning" of the stock market drop reflects my more conservative, pension-manager approach. And this approach will serve us well as poor markets come to an end followed by recovery. I don't know when this will happen. I do know that the doom-and-gloom that we find in the media will continue right through to the recovery. Stock market recoveries do not announce themselves: they arrive in fits and starts so that, only in hindsight, do we see their beginning.

So while we wait, let's turn to something more important. It's what I call the forgotten element in retirement planning. Retirement planning tends to focus on crunching the numbers to see what we have to save in order to reach our goal later. That's important, but what are we really pursuing?

We are pursuing a freedom to balance play and work in a way that is meaningful to us. For some, retirement means continuing a rewarding career but also playing as much as they want. For others, retirement means all play and no work. For everyone, it's the play that we look forward to whether it's learning to sail, travel, and so on. And what is the most important ingredient that enables play? Is it money?

I submit that the most important ingredient for play is good health. This is the forgotten element in retirement planning: without good health, play can be very restricted. If you agree with me on this, you may also agree that good health is a lifelong pursuit: you can't wait to develop good health, you must build it into your lifestyle now through exercise and good eating. Lord knows I struggle with this, but I try to remember just how important it is. All the saving in the world might not come to much if we haven't looked after ourselves.

One last point. Good health, unfortunately, is not a guarantee and if we are blessed with good health at the moment, then let's take advantage of it by doing some of the things, now, that we hope for. Want to learn to sail? Whatever your passion, why not sign up and get started?

Happy sailing!

Warm regards,

Tom

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
#600, 1414-8th Street SW
Calgary, AB T2R 1J6
TEL 403.229.0128
FAX 1.866.386.9776

Thursday, October 16, 2008

October 11, 2008--article from the Toronto Star

The following article is written by David Olive, a business columnist with The Toronto Star, who shares his take on making sense of current stock markets.

Please use the link below, or, if the link becomes inactive, I have copied the article below.

http://www.thestar.com/article/515946

TheStar.com - Business - Harper's not wrong on bargains
Markets to worsen before stocks hit rock bottom
So, in these uncertain times, what to do about your stock portfolio?


October 11, 2008 David Olive, Business Columnist


Buy on the sound of cannons.
– Rothschild family investing maxim

Some of us might be tempted by the bargains emerging in the incredible shrinking stock market. But we're waiting to exhale. Since last fall, when the looming global credit crisis first began to command the attention of the powers that be, the worldwide emergency crew of central bankers, finance ministers and regulators have, with mounting aggressiveness and creativity, experimented with a succession of more drastic rescue measures. So far, none have restored the investor confidence needed to arrest the downward spiral in stock values.

This week began for me with a call from an investment banker acquaintance urging me to join with his peers in "going to cash." By which he didn't mean GICs. He meant taking enough cash out of the bank to cover expenses for a few months. If today's plummeting share values go on much longer, "going to the mattresses" will no longer mean preparing for a war among the five families, as it did in The Godfather.

Yet, the global stock-market decline of nearly 40 per cent since June's peak is typical of severe bear markets, from which patient investors stoic about their paper losses have subsequently done very well. Just as bull markets always end, so do bears. And as an economist noted Thursday on PBS, "it's rare that you see this level of pessimism at the outset of a market collapse. It's more characteristic of the end."

Caution certainly is warranted. We're still a ways from the previous Dow Jones industrial average nadir of 7,286 in October 2002. Conditions likely will worsen further before equity markets bottom out. Investors already have been punished. I haven't seen Canadian estimates yet, but Americans are suffering a paper loss of about $2 trillion (U.S.) in their retirement savings. And it's tough to restore investor confidence when the news is dominated by the sudden disappearance of once-mighty U.S. financial institutions that controlled $11 trillion in assets.
Yet, it's too bad the expression fundamentally sound lost its reassurance value at the time of Herbert Hoover. Because the real economy is sound. Canada created 87,000 new jobs in the first eight months of this year, and 1.5 million since 2002. The jobless rate of 6.1 per cent is modest by Canadian standards. An otherwise gloomy report by the International Monetary Fund last week said that with an estimated GDP growth rate of 1.2 per cent, Canada will outperform its G8 peers, while avoiding recession.

Corporate balance sheets worldwide, outside of the financial sector, are for the most part strong. Inflation and interest rates are historically low. These are unusual signs of vigour for a downturn. The real problem is that stock markets are a slave to a global credit market in paralysis, a novel scenario in modern times. A U.S. capital markets observer last week said that "No one's afraid to lend to Berkshire Hathaway or Microsoft. It's only the financial companies they're leery of, because no one knows the true value of the 'assets' on their books." Yet, while it may be the arcane world of high finance that's gone haywire, not the broader economy, investors fret that eventually such recession-resistant firms as McDonald's Corp. will run dry of funds to pay its meat-patty suppliers.

But the point at which the real economy is starved altogether for capital is far off, and likely won't arrive. The orthodoxy-busting measures taken by world governments haven't yet had time to kick in. And it's manifestly evident that governments are prepared to do anything required to get credit markets functioning properly again, even if they have to convert post offices to state-run bank branches.

So, in these uncertain times, what to do about your stock portfolio?
Think twice about selling, because that will just lock in losses that now exist only on paper. It is a good time to evict the dogs in your portfolio and take a 2008 tax loss.

If you're invested in battered blue chips, and bought them, as Warren Buffett has long advised, because they're good companies worth owning forever, it's probably best to hang on for the inevitable upturn. There's no need to sell companies if they retain the solid balance sheets, consistent dividend payouts and dominant market-share position that drew you to them in the first place. These companies will emerge stronger from the downturn, if only for their ability to benefit from bargain-priced acquisitions and the shakeout among weaker rivals.

Finally, should you engage in bargain-hunting, the last thing on the minds of today's panic-stricken investors streaming for the exits? The answer is yes, if you believe, as I do, that this century will be the most prosperous in history. This century will be bereft of wealth-destroying world wars and will see developing-world economies – and not just China and India – striving for developed-world living standards. In what we once quaintly called the Third World, there will for decades be voracious demand for power plants, upgraded public-transit systems, the firefighting water bombers in which Bombardier Inc. has a global near-monopoly and the Waterloo, Ont.-designed BlackBerrys.

What to buy? The global food shortage that made headlines last summer hasn't gone away. Yet, such agribusiness stars as Potash Corp., Agrium Inc., Deere & Co., Archer Daniels Midland Co. and Monsanto Co. are all trading at about half their five-year highs.
Infrastructure giants that build power plants, elevators, construction equipment and lighting systems, including General Electric Co., United Technologies Corp., Caterpillar Inc. and Siemens AG, are trading at a one-third to 50 per cent discount to their five-year highs.
And each pays a generous divided (6 per cent in the case of GE) to cushion the short-term blow even if these stocks have a bit further to fall before rebounding. Leading chemical producers share that distinction, including BASF AG, Dow Chemical Co. and E.I. du Pont de Nemours & Co.
Some of my favourite defensive stocks are also available at fire-sale prices:
Walgreen Co., the dominant U.S. drugstore chain (about 50 per cent off its 5-year high); Rona Inc. (down about 60 per cent, and takeover bait for Lowe's Cos. or Home Depot Inc.); Big Pharma stocks Merck & Co. Inc. and Bristol-Myers Squibb Co., each trading at little more than half their 2003 price and boasting outsized dividends; and Cisco Systems Inc., the world's best-run supplier of telecom and Internet gear trading 45 per cent below its five-year high.

"There are probably some great buying opportunities emerging in the stock market as a consequence of all this panic," economist Stephen Harper, whose day job is running Canada, said earlier this month. "When stock markets go down people end up passing on a lot of things that are underpriced."
Harper was excoriated, of course, for real or perceived insensitivity to those with paper and locked-in losses, retirees in particular, during the admittedly cruel market of the past several months. But on this point, at least, Harper's empathy deficit doesn't make him wrong.

David Olive writes on business and political issues. He can be reached at dolive@thestar.ca.

October 9, 2008--Dealing with emotional times

Greetings.

I try to have a clear sense of my role as your advisor, especially during turbulent times in the markets. Communicate, answer your questions and emphasize the rational perspective in the midst of emotional times. These are emotional times and are response is not helped by the newspaper or CNN, so it's important for me to provide perspective in the midst of the noise. I hope these newsletters help, and be assured that I will keep writing them.

I attended a four hour seminar yesterday that was well-timed. The subject was stock market history and, in particular, the general behaviour of investors, economists and the media during times of bad markets [called "bear" markets]. Let me share a few of the highlights.

Not surprisingly, falling portfolio values can make us feel fearful, triggered by the question "how bad can this get?" We know that economists are not immune to this fear and so their comments are not always helpful. Thus fear can turn into panic in which people become irrational and say "sell at any price, let's just get out." This behaviour, although self-destructive to our portfolios, occurs when emotions over-rule the mind.

Another quick example of the power of fear was documented during the SARS virus crisis in Asia: one in four people thought that they were likely to get the virus and die, even though the actual probability was many times smaller.* How can we deal with fear and avoid panic?

Focusing on the facts related to bear markets helps our mind to keep the fear in check. So let's do that. The facts about bear markets are--

-Bad markets have always been followed by good markets and that is why patience is critical to success.

-Trying to time the markets to avoid bear markets, however tempting the thought, is not practical.**

-Bear markets are what we have to tolerate in order to have growth in our money over the long term and achieve our goals.

-Our mutual fund managers are always active. With this, they have lessened our loss as compared to the broad market index and are now actively buying bargain stocks which will assist the recovery of our portfolio when good markets return.

-For those investors still in the saving time of life, it's important that they continue to invest since cheap stock prices in good companies are available now. A bear market is an opportunity.

-Most investors have consistently done the wrong thing at the wrong time by buying high and selling low. We must not follow the herd. Fight the good fight

When we try to stay rational, our emotions may fight back. And what is the number one lie that our emotions will scream at us--"it’s different this time!" That lie comes out with every bear market we humans go through. And we need to recognize that this lie fuels the newspapers and the CNNs, for the simple reason that they want you coming back to hear more. Their role is not to give you good advice. But it is my role.

If you want to read more, I’ve offered some thoughts below.

Warm regards,

Tom

*You can read more at-- http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aO8VJ9Y7qjrQ

**Why is timing the market so hard? Because we need the crystal ball twice: Once to know when to sell; once to know when to buy back.

My other thoughts if you want to read more-- I mentioned Warren Buffett in my last email, one of the wealthiest men at $50 billion. Did you know that seven months ago, Buffett was worth $62 billion? When markets go down, he's not immune to paper losses. Here's the question I have--if you and I lost $12 billion, how would we react? Would we be tempted to sell and run for the hills? What did Buffett do? He invested $8 billion of his money. Why? Because he saw opportunity in the bear market and did what he's done all his life: invest when others are afraid. He's sticking to the process that made him wealthy in the first place. Buffett is rare as seen by the wealth that he has accumulated.

When Buffett is asked what the "secret" of his success is, he answers that he was fortunate enough to study with the father of "value investing," Ben Graham. Among the ideas that Graham put forward is that the price of a stock today may have nothing to do with what the stock is worth. Remember that stocks trade by auction, so every time someone sells, it's because someone else is willing to buy.

Further, in bear markets—when sellers line up in a panic to sell—it follows that the buyer has the possibility, then, to buy stock very cheaply. If the buyer has done his homework and identified a fundamentally sound company, he needs then to just wait and buy when that company's stock is on sale at a good discount. No wonder then that Buffett [and the fund managers that I like to use] are busy buying during this bear market.

If this sounds simple enough, why doesn't everyone do it? Because a bear market is accompanied by fear and panic and these can paralyze rational behaviour. Buffett is rare because he remains rational even when surrounded by fear. There’s one more ingredient that goes into “being a Buffett.” Once you’ve bought stock in a fundamentally sound company at a good discount, making money requires patience while waiting for the stock price to go up. And you must continue to be patient even if the stock you’ve bought goes down in price [this requires fortitude].

Finally—and then I will stop for now—being a Buffett is not about being right all the time with your stock picks. That would be impossible. But the discipline of buying good companies when their stock is on sale is all about increasing your probability of making money. You don’t have to be right with every company in order to win in the long run. That’s what Buffett has shown and Ben Graham taught him.

Tom Buck, M. Ed., CFP
Certified Financial Planner
Assante Financial Management

October 6, 2008--US Congress supports bail-out

Greetings!

The US Congress voted for a second time on the bail-out proposal. As expected, the proposal did pass and the bail-out is now approved by both the Senate and Congress. This clears the US government, on behalf of taxpayers, to begin purchasing sub-prime mortgages from US financial companies in an effort to ease the paralysis that has prevented US institutions from lending to one-another, a practice that happens regularly under normal conditions [you may want to refresh your memory on this by reading my newsletter of Sep. 18th].

The bail-out proposal has stirred a great deal of controversy in the US with some arguing that it was a bad deal for the taxpayer and rewarded incompetent banking executives. Without addressing all aspects of the controversy, let me point out that Warren Buffett is on record saying that, given the chance [which he was not], he would have invested $7 billion of his own money in the bail-out effort. Why? For the simple reason that he things the US taxpayer will end up making a nice return on the sub-prime mortgages being purchased. That is, the bail-out involves paying pennies on the dollar for the sub-prime mortgages and Buffett believes that, in time, those mortgages will be sold for more than the US taxpayer is paying for them.

The example of the US bail-out is being followed in some European nations. Canadian financial institutions had relatively small exposure--or none in the case of TD Bank--to US sub-prime mortgages so, to my knowledge, there is no talk of a similar bail-out planned in Canada.

And what about stock markets? The TSX opened sharply lower today as sellers drove markets down about 1200 points before buyers jumped in pushing the markets up about 650 points before the closing. Sellers and buyers will continue to battle it out and the current fearful environment will probably mean more sellers than buyers for awhile yet. There is always a mob mentality that drives markets in the short term. When fear is "in the air" and splashed across newspapers and TV news, it is contagious and makes it hard to act rationally.

I'll finish this newsletter by quoting Warren Buffett, the most successful individual investor of all time who has built a net worth of over $50 billion [and is giving almost of it all away to charity]. In talking about his investment philosophy, Buffett said--

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Bye for now,

Tom

PS--as you've probably guessed by now, Warren Buffett is one inspiration for my investment philosophy and his life story is a fascinating one [did you know that he still lives in the same modest house in Omaha that he bought for $31,500 in 1958, doesn't carry a cell phone and drives his own car?]. If you would like to read more, check out--

http://en.wikipedia.org/wiki/Warren_Buffett

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd

September 18, 2008--US financial crisis

Greetings!

My frequency of communication with you has picked up to try to keep up with the headlines. Recent coverage of events in the financial markets, of the US in particular, may create concern among some of you. I have had only three communications from concerned clients in the last couple of weeks, but my hope is that my newsletters will help all of you to make sense of what is going on.

Allow me to begin with conclusions first and address some of the more alarming headlines—

While there is confusion and concern about US financial companies as the impact of the sub-prime crisis works its way through the system, we are certainly not on the verge of a global financial collapse.

Question—since mid-May, which stock market has fallen further, Toronto or New York? Based on the panic headlines about the US, you would think it’s New York. In fact Toronto has fallen more, largely due to the sell-off in resource companies. I mention this because no one in the media is talking about the end of the oil industry; they’re too busy writing headlines about the US. Needless to say, we shouldn’t believe everything we read.

The value of a company as a business enterprise has little to do with the price of its stock today. Stock prices are falling across the board, yet Coca Cola still has a “license to print money.” The value investor is always thinking "I’ll buy Coke stock when it becomes cheap because other investors are distracted. Then I’ll sell the stock at a profit when other investors remember that Coke is a great enterprise."In spite of the sub-prime crisis, people will continue to drink Coke, visit Home Depot to plan a renovation, put gas in their cars and continue to invest for retirement.

Let me say more about the US financial crisis by looking at AIG Insurance, the most recent chapter in the story. This week, AIG Insurance was bailed-out by the US government. For $85 billion, the US government took an 80% ownership of AIG and prevented its collapse. AIG is the largest insurance company in the world. Perhaps surprisingly, AIG was and continues to be a strong enterprise with over 100 profitable divisions [lines of business] and 116,000 employees world-wide. Virtually every American owns some AIG insurance on their house, car, etc. Insurance is one of the most profitable enterprises you can find. AIG doesn’t sound like a prospect for bail-out, does it? So what happened?

A while back, AIG’s bosses decided to diversify into a new business line and insure mortgages investments, including investments derived from sub-prime mortgages. We’ve all read about sub-prime mortgages, but a quick review. Mortgage brokers were paid to write new mortgages with home-owners with poor credit ratings [thus the term-sub-prime]. In many cases, these people were unable to maintain their mortgage payments and defaults became widespread. Further, the mortgages were secured by houses with inflated values. The result of the defaults is whole neighborhoods as ghost towns filled with foreclosed housing that no one will buy. And written against these empty houses are worthless, sub-prime mortgages.

On top of this predatory lending practice, investment banks like Lehman Bros packaged and re-packaged these mortgages into investments [known as derivatives] and sold them as high-interest alternatives to savings accounts, at a time when consumers were fed-up with the low interest rate environment. You can see the picture now of this “house of cards.” [The whole episode is a disgraceful story of bankers’ greed, the failure of bond-rating services, the failure of government regulation….but that’s another story].

Back to AIG. In insuring mortgage investments derived from sub-prime mortgages, AIG had made a promise to compensate the investor should the mortgage investment turn bad. As the sub-prime mortgages were revealed as junk, AIG had to begin to pay up. At that point, AIG had a liquidity crisis, much like, to use a metaphor, the wealthy professional with the nice house, cars, cottage, who loses his job--lots of assets, great net-worth statement, but a cash-flow problem. That was AIG.

Just a few months ago, AIG had no problem raising cash by issuing shares which were gobbled up by investors. But in the last month, the sentiment has changed completely, driven by fear about just how big the sub-prime crisis might be. And, afraid, investors did not want AIG shares at any price. In the same way, banks that previously would have lined up to lend money to the world’s largest insurance company held onto their cash. Thus the US government became the lender of last resort.

So, here’s the point. AIG is a strong enterprise [the US government admits that their $85 billion investment will likely turn out to be a good one as the government sells off AIG’s profitable business lines]. AIG went under because fear prevented AIG from accessing solutions—issuing shares or borrowing money—that a strong company like AIG would normally have access to. The sub-prime crisis has created fear that has paralyzed the financial system. But the system is not a quadriplegic that will never walk, it’s just too scared to get out of bed.

Yes, it’s disturbing, but the fear will pass. This is reflected in the debate amongst most experts about HOW LONG the crisis will take to pass, not IF it will pass. As I’ve said before, markets in the short term are driven by fear and greed. Fear is having its day right now, and stock prices in both good companies and bad have fallen. But as the fear passes, more and more investors will turn their attention to good companies with cheap stock prices, and start to invest as the recovery begins. And so the cycle will continue as it always has.

Cheers!

Tom

I welcome your questions and comments.

copyright September 2008
Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd

September 9, 2008--follow-up to letter of Sept. 4

Greetings again!

I have had some good feedback on my newsletter of last week. One client responded by asking for "good news" as it comes along. Well, I have just been updated with August performance numbers for mutual funds that I use with clients and it confirms the perspective expressed in The Globe and Mail article that I included with my last newsletter--namely, that August was a very good month for value investors. September, in spite of the falling TSX, is a similar story.

So while I do not focus on short-term numbers, let's look at the recent August performance. First, the context--In my newsletters since November last year, I wrote that resource stocks had reached irrational price levels and, while not knowing when, I expected a sell-off as the price of oil moved down. When this happened, investors would move to value stocks [i.e. good companies with reasonable stock prices].

Remember that markets in the short term are driven by fear and greed. When one sector of the economy has stock prices driven up to irrational levels, a correction follows at some point when the direction reverses and fear kicks in. We can avoid, to some extent, the wild ups and downs of the stock markets by focusing on reasonably priced stocks in good companies, an example right now of value stocks being bank and other financial stocks. But there will be times when the value approach takes time to pan out and, certainly, the last year-and-a-half has tested the patience of you, my clients. I thank you for your patience.

So how did August performance of my mutual fund choices provide good news?

I'll just cite a few representative examples--

Canadian stock funds--in the month of August, the Toronto Stock Exchange [TSX] lost value while Trimark Canadian Endeavour fund was up 6.4% in the month. As for Canadian Balanced funds [~50% invested in Canadian stocks] Trimark Select Balanced was up 3.5%, Mackenzie Universal Canadian Balanced was up 4.0%.

On the global stock side, Trimark Fund was up 3.1%, Trimark Global Balanced up 1.7%; Mackenzie Cundill Global Balanced up 2.3% in one month.

What's happening right now with the Toronto Stock Exchange falling one day after another?

Here's a quote from The Globe and Mail late today--

"Jeff Parent, associate portfolio manager at Quadrexx Asset Management, expects commodities to continue their slump through the end of the year. He'll be looking to the financial sector to power any gains on the TSX for the rest of the year. Natural resources are getting killed," he said. "But I think there's a realization that the U.S. financial system is in somewhat of a recovery, and the Canadian banks are on fundamentally stronger ground. I think we'll see the financials start to take control of the index."

What to expect in the months ahead?

Month by month, expect volatility. And I would suggest you don't watch your portfolio month by month if the ups and downs are going to upset you. Want to know how your portfolio has done? Look at 5 and 10 year average rates of return [which I always give you when you come in to see me]. That's exactly what I do when selecting good mutual funds for my clients. Shorter-term performance is distracting, can be upsetting, and tells us nothing about what investments will do well in the long term.

Thanks for your comments and questions. You are always welcome to come and see me and, in fact, if we have not met face-to-face in the last year, please call me to schedule a meeting.

Warm regards,

Tom

Tom Buck, M. Ed., CFP
Certified Financial Planner
Assante Financial Management

September 4, 2008--stock market commentary

Greetings!!

I hope that everyone enjoyed some summer relaxation. I want to send you a brief note of update on the markets and an article to read to provide perspective. The recent decline in the Toronto Stock Exchange index is actually good news for value investors like myself [and therefore you]. The reason for this is that value investors do not buy the index [TSX] which is currently loaded with resource stocks [oils, minerals, fertilizer...] which are currently in some kind of free-fall. And with a free-fall in over-priced stocks, investors everywhere tend to shift their money to quality companies with stock prices priced for value.

Well, these are the companies that value investors already own which currently includes, for example, bank stocks. I expect the shift to value stocks to continue which will reward value investors who, admittedly, have had to be a patient bunch lately. But, it's a pattern we've seen before which has provided long-term value investors with excellent returns and "fewer free-falls."

So don't be alarmed by the news on the falling TSX. I'm providing below a recent article that argues for a view that I share and have written about in my last several newsletters. Please have a read in order to gain perspective on what's been happening in Canadian markets. I provide the article because I couldn't have said it better myself. http://www.theglobeandmail.com/servlet/story/LAC.20080903.RHEINZL03/TPStory/Business Questions?

[If the above link is not clickable, copy and paste it into the address bar of your browser. If that doesn't work, let me know and I will get the article to you].

Warm regards and bye for now,

Tom

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd

Wednesday, October 15, 2008

June 11, 2008--Caution re: Reverse Mortgages

Greetings!

You may have seen the TV ads for reverse mortgages showing very happy seniors enjoying their new-found money. It's promoted as the "CHIP program." A reverse mortgage, as the name suggests, is a way for seniors to get a lump-sum, tax-free payment based on equity that they have in their home. As you can imagine the payment creates a debt against the house. And, because the senior typically makes no payments against the debt, the debt grows quickly due to the accumulating interest owing.

Now, one might expect that the interest rate charged on this debt, by CHIP, might be comparable to mortgage rates [e.g. for a mortgage, the current fixed 5-year discounted rate is 5.25%]. Unfortunately this is not the case. The current fixed 5-year rate on the CHIP loan is 8.6%**. That's high. And at 8%, for example, the size of the debt to be repaid will double every 9 years.

Imagine, then, a senior pulls out $100,000 at age 65. By age 83, the debt will have grown to $400,000 [which is typically collected by CHIP when the house is sold]. To be fair, the house should rise in value over those 18 years, but the bottom line is that the CHIP interest rate is high resulting in a compounding growth of the debt that can become painful to the senior and the family.

If you know of anyone contemplating a reverse mortgage, my advice would be for that individual to get an expert, second opinion and to explore alternatives to the reverse mortgage. Only then can an intelligent decision be made on the merits of the reverse mortgage for that individual.

Cheers!

Tom

**RATES AND FEES TO PARTICIPATE IN THE CHIP PROGRAM--"There are some set-up costs. The fees for an independent home appraisal are typically $175 to $400. The amount varies by province and whether you're in an urban or rural area. Fees for independent legal advice are typically $300 to $600. In addition, legal & closing costs of $1,485 are deducted from your CHIP Home Income Plan funds so they are not an out-of-pocket expense." [see details at http://www.chip.ca/index.cfm?id=100&language=english ]

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd

May 27, 2008--Follow-up to letter of May 14

Greetings again!

About a week ago, I sent out my last newsletter about how speculators differ from pension managers, and my approach to investing RRSPs for retirement. If I were to highlight one point from that article, it would be this—in managing RRSPs we have to aim for reasonable and reliable returns to reflect the importance of accumulating and maintaining a nest egg for retirement.

In 2007, we’ve experienced something that we need to expect, namely that not all our investments always go up. So “reliable” does not mean every year is a good year! This is the price one pays for growth. Take for example one of my favourite funds Trimark Global Balanced fund. It has a 5 year average annual return of 10.7% per year [which is great] but last year dropped by 12% [ouch].* But remember that the 10.7% result includes last year’s loss.

Thus we are reminded of the importance of focusing on the long-term rate of return and ignoring, or at least keeping perspective, when looking at one year results. This brings me to the message of this newsletter and I’ll stick with my example of Trimark Global Balanced fund [there are other examples I could use]. Let’s consider the following facts—

1. Over any 5 year period in history, the fund has never dropped in value. The average annual compound return for this fund over all 5 year periods is 9% per year.**

2. The fund has been around for 8 calendar years. During that time, it dropped in value in only 2 of those years. In 2002 the fund dropped by 8.1%. The next year, 2003, it gained 23.5%. In 2004 it gained 11.2%. So here are my points. Growth funds will drop in value about once in every 4 years [when averaged over the long term]. We should expect this to continue and understanding this will help us weather the bad years.After growth funds have dropped, they have eventually recovered [gone up] and often they recover quickly.Good funds over the long term provide reasonable and reliable returns. Let me finish by pointing out that Trimark Global Balanced fund dropped by 8.1% in 2007.

So what might happen next? Well, it’s already started—the fund made 4.62% in the last 3 months. And if history repeats itself, and I’m confident it will, I’m going to be writing another newsletter down the road—a year from now, two years?—and saying, yes, our patience in the aftermath of 2007 was rewarded. And what I can say right now is thank you for your patience and for trusting me to be your advisor.

Cheers!

Tom

PS—have any questions for me? Please let me know.

*for the period ending March 31, 2008. Note that 10.7% occurred at a time when GICs were paying about 4%.

** measured by a “trailing return basis” meaning that for each month that the fund has been around, you go back 5 years and measure the return.

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd

May 14, 2008--Timeless truth about investing

Here's my perspective on a timeless truth about achieving long-term investment success. But first, some quotes--

"Despite the recent record jump in oil prices, the outlook suggests that oil prices will continue to rise steadily over the next five years, almost doubling from current levels." --Jeff Rubin, chief economist at CIBC World Markets, predicting in April this year, that the price of oil will go to >$US200 by 2012

"It (the future price of oil) is all speculation. We might as well be talking about the future price of broccoli or TV sets." --Bruce Orr, spokesperson for the Canadian Petroleum Institute, commenting on Rubin's prediction

Many people love to predict and to read the predictions of others. You can't help noticing, though, that people who predict rarely agree on their predictions. Makes me glad I'm not an economist.

Is the ability to predict the future a key to being a successful investor?

It depends on what kind of investor you are and how you define success. Every investor has to wrestle with the fundamental fact that the higher the rate of return you target, the higher is the risk that you will not achieve your target. This is known as the law of the risk/return relationship. "Speculators" are investors who want big rates of return, the bigger the better, and sooner than later. This requires the investor to make the right prediction AND to sell before any gains become loses.

Speculation is inherently risky because pursuing big potential returns puts you at higher risk of losing your money. Speculation, therefore, puts your capital at risk and leads to unreliable rates of return. I have been told by professional speculators/investors that for every 10 stocks chosen, they expect--on average over the long term--7 of those stocks to lose money. They hope that the remaining 3 stocks will go up enough to cover those losses and leave them with a profit. Speculation, when it works, can be exhilarating, even intoxicating. And the toughest things about being a speculator? Knowing when to sell and tolerating loses.

I have nothing against speculators but it's not what I do for clients. I'm another kind of investor that is best described as a "pension manager."

How does a pension manager differ from a speculator?

1. Pension managers avoid losing money. A 50% loss requires a 100% gain just to get your capital back. Yes, there may be paper loses over short time frames, but you certainly do not want loses in the long run. That brings us to the second point.

2. Pension managers aim first, over 5-plus years or more of investing, to preserve capital. The second goal is a "reasonable and reliable" rate of return.** In other words, pension managers will not chase big returns because preservation of capital comes first.

3. Pension managers don't believe that consistently predicting the future is possible, and don't speculate with other people's money.

4. Pension managers balance risk and return to maximize the possibility of reaching your target rate of return with the minimum amount of risk possible. This is key.

5. Pension managers rely on a patient, disciplined system of investment analysis developed over years of testing. And they do this in an effort to provide a reasonable and reliable rate of return in the long term. **

**Note "reasonable" means a rate of return that aims to be higher than what a "no-risk" bank account will pay. "Reliable" means a rate of return we can be confident--but not certain--about achieving over the long term. [Not certain because past returns do not guaranteed future returns.]

If someone asked me, 'what's the most important thing you try to do for clients?' my answer would be that I help clients achieve their long term financial goals. Now, "achieving financial goals" may sound like nothing more than a slogan. But consider this. My typical clients come to me long before they retire and we work out a plan, including projections for rates of return, to allow them to look forward to their retirement goal. And, not surprisingly, it really matters that those projections be reasonable and reliable.

I started in this business 14 years ago in April 1994 which is long enough ago that some of my first clients are now entering retirement. And what started out as a projection into the future is becoming a reality and they and I see, right now, whether their retirement goal was achieved. In other words, the retirement plan we designed years ago is now, in effect, being "graded"--does it get an "A' or an "F" grade? I'm proud to tell you that it's an "A." And that brings me to why I'm a pension manager--my clients rely on me to try to protect their capital and provide a reasonable and reliable rate of return over a period of many years. Without these things, we can't plan and they can't hope to achieve their goals.

Cheers!

Tom

Tom Buck, M. Ed. CFP
Assante Financial Management Inc.
email: tom.buck@ethicalfootprint.ca

November 26, 2007--Best Wines of 2006

Greetings!

The Wine Spectator has just released their list of what they consider to be the best wines released in 2006. Wine Spectator is not my wine bible by any means, but there is so much wine available that it's nice to try some that someone else liked.

I have sorted the list since, being a thrifty person by nature, I like to spend under $25 for a bottle of good wine [under $20 is even better!!]. So...here are the cheapest wines in Wine Spectator's list of top 50 wines of 2006. Note that prices are quoted by the Wine Spectator; expect prices to be a little higher here--

$17...MATUA SAUVIGNON BLANC, MARLBOROUGH, NEW ZEALAND, PARETAI ESTATE SERIES, 2005

$17...KIM CRAWFORD SAUVIGNON BLANC, MARLBOROUGH, NEW ZEALAND 2006

[I have had this Kim Crawford wine and it's excellent. I found it in Calgary at Willow Park Wine Stores and a month ago found it at the Costco at the end of Sarcee Trail, location shown at the link below-- http://www.costco.ca/Warehouse/LocationTemplate.aspx?Warehouse=543&lang=en-CA NOTE that no other Costco's in Calgary have a wine outlet. The Costco selection is quite small but the prices are excellent. If you do go there, try a Spanish red wine, if it's still there, called JUAN GIL.]

$20...THE HESS COLLECTION CHARDONNAY, NAPA VALLEY, US, 2004$23...PIRRAMIMMA SHIRAZ, MCLAREN VALE, AUSTRALIA, 2003
$23...LANGMIEL SHIRAZ, BAROSSA VALLEY, VALLEY FLOOR, AUSTRALIA, 2004$25...YANGERRA ESTATE GRENACHE SHIRAZ-MOURVEDRE, MCLAREN VALE, AUSTRALIA, CADENZIA, 2004

Oh, and the #1 wine of 2006 scored 97 and is yours for $70. It's from Italy, CASANOVA DI NERI BRUNELLO DI MONTALCINO, TENUTA NUOVA, 2001.
And the cheapest wine in the top 100 is listed at $12 [I paid about $16 for it at BIN 905 Wine Store] and it scored a 90. It is a delicious red wine...BODEGAS BARSAO GARNACHA, CAMPO DE BORJA, TRES PICOS, 2004

Happy hunting. If you find one of these wines in Calgary, please let me know where and how much so that I can pass on the news [or maybe you want it all to yourself!! :) ]
Cheers!

Tom

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
email: tom.buck@ethicalfootprint.ca

November 2, 2007--Stock market commentary

Greetings.

Without a doubt, the story of 2007 for Canadian investors is the unexpected rise of the Canadian loonie versus the US dollar. Imagine, year-to-date in 2007, the loonie is up 24% versus the US dollar. The other story is the high price of oil. I wanted to share my perspective so please read on.

Is this good news that the $CDN is up?

It depends. If you want to buy books at Wal-Mart, you can pay the $US price now instead of the higher $CDN price. If you're going on a holiday south, you may have savings passed onto you. But the news is not all good. Here's a simple example. One of my favourite fund managers, Brandes Investments, made some very good stock selections, buying Intel, Dell Computers and Microsoft Corp before January 1, 2007. Year-to-date, the Intel investment is up 32%, Dell up 22%, Microsoft up 23%. Did Canadian investors in Brandes reap the benefit? No, because the gain on the stock was all but eliminated due to the rise in the $CDN [and therefore the corresponding drop in the $US]. And the same applies to virtually all global investments that Canadian investors have made. A total of 1176 global stock funds, available to Canadian investors, did not make money so far in 2007 [obviously I'm talking about the funds priced in $CDN].

So why own global funds if you're Canadian?

[1] While it's true that our holdings in global funds have been recently punished, the merit of investing a portion of your portfolio globally has and will continue to exist. I won't list all of the reasons here, but consider that most of world's attractive, profitable companies are not based in Canada. And you can only buy stock in these companies by first buying the local currency.

[2] The Toronto Stock Exchange Index [TSX], which is a broad measure of the Toronto stock market, started going up five years ago due to rising stock values in oil/gas companies, minerals and banks. The result is a five year average annual return for the TSX of 20.5%! This result should make us cautious.

Why be cautious now about the TSX index?

Here are some interesting facts--The TSX had an excellent 5 year period ending in September 1987 [it averaged 23.6% per year]. During the next five years, ending September 1992, the TSX had grown by 0%. Five more years, to September 1997, the TSX had an excellent return [again averaging 20%+ per year]. During the next five years to September 2002, the TSX lost money. As you can see, the cycle is remarkably consistent. True,past performance does not guarantee future performance, but here are my thoughts.

1. The TSX is cyclical because it is primarily a market of resource stocks, and resource companies are classically cyclical. Calgary is a boom and bust town for a good reason! Think Alberta housing prices can only go up? Think that the resource or bank stocks you might own can only go up? Think that the price of oil can only go up? Be cautious.

2. Not happy about the recent performance of your global funds? Wait a few years and then see how you feel. Now may be a particularly good time to own global funds, which all of my clients do.

3. Don't look to sell your Canadian mutual funds--unless they are firmly focused on resource companies--but own Canadian funds with abroad mandate, meaning the managers can buy companies in any sector. And buy funds where the managers have a record of doing well when the TSX is not. These manager focus on value. They will not own overpriced companies no matter how well they've done recently.

* These are my thoughts that drive how I have been, and will be, managing your investments. I welcome any questions you have. Remember, it's important that I see you at least once per year to review your portfolio and to have you update me on your financial situation. The reviews allow us to ensure that your portfolio is still appropriate for your needs and to consider any changes.

Last thing--some clients have asked me to predict where the $CDN goes from here. To be sure, economists have a lousy record of making such predictions and I'm wise enough to not even try. Consider, though, that the $CDN has spent the last thirty-odd years at a lower price than it's at now. That won't tell you when, but it may tell you what direction from here. I'll finish with a quote from one of the managers I respect, Bill Miller of Legg Mason Capital Management, from September 2007--

We actually try to buy low and sell high, and you don’t buy low when everything is great and the headlines reflect it. Usually (but not always), when you read about some industry or company having the worst time since some period of years, or even decades, ago, you will find that buying that industry or company when it was going through those difficulties proved quite profitable if your time horizon wasn’t measured in days or months.

Cheers!

Tom

Notes--*For those of you who like statistics, here's another one that suggests caution about the TSX. In the nearly eight calendar years of this decade, the TSX has outperformed both the US and EAFE [Europe and Far East] markets in six years. This is unprecedented historically: in the previous thirty years, the TSX outperformed only 30% of the time. These facts imply that it's time for the US and EAFE to have a turn. Some may say that it's different this time because oil is only going to go up in price. I don't believe that. And since Calgary is an oil town, I'll provide a somewhat lengthy assessment of energy prices, again from Bill Miller.

Miller, a US stock manager, is considered one of the very best managers based on his long-term record [see http://money.cnn.com/2006/11/14/magazines/fortune/Bill_miller.fortune/index.htm].

Energy and energy related stocks continue to be among the market’s best performers and we don’t own them. That sector was the strongest performer in the month of June, in the second calendar quarter of 2007, in the 6 months ending June 30, and in the three and five year periods ending June 30. Only in the 12 months ending June 30 did other sectors perform better. It is said the only thing worse than being wrong is staying wrong. The question for us now is have we experienced a long cycle in energy, or is this a secular change where energy prices will not decline in real terms, as has been the historic norm, but will be stable or maybe even increase after adjusting for inflation.
That question should be answerable shortly. We are at or near the high prices for oil that were reached last summer. Most other commodities prices have peaked and have now declined from the highs achieved either last year or earlier this year, including nickel, once thought to be in a secular shortage situation, and corn, whose price has been boosted by government mandated ethanol programs. If oil retreats from these or modestly higher levels over the next 6 months, it is likely that we are nearing the end of a long cycle. If it breaks out to new highs and stays there, then the secular story may carry the day. Interestingly, prices for natural gas, which is both environmentally friendly and long term substitutable for oil, are not only less than half the levels reached post Katrina, they are also below the average price of the past year or so. Finally, speculative interest in oil futures on the commodities exchanges is at record levels, while oil companies and others in the industry are net short the commodity, believing the price will decline. Stay tuned.
--Bill Miller, Sep. 2007

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
email: tom.buck@ethicalfootprint.ca

November 1, 2007---RRSPs for Children

Greetings.

A couple of client questions prompted me to write the following about RRSP contributions for children.

Can a child contribute to an RRSP?

Yes, regardless of age, children can contribute to their own RRSP providing they have RRSP contribution room.

How does a child get RRSP contribution room?

Two things have to happen. A child must earn money and the child must file a tax return declaring that income. After filing, CRA [the federal tax people] will mail a Notice of Assessment. On the bottom of that notice will be the box that identifies any RRSP room for the next tax year. Note that the RRSP room for any year will be calculated as 18% of the child's earned income in the previous year.

Is it a good idea for a child to contribute to an RRSP?

While it's always good to take advantage of an RRSP [unless a person's income is perennially low], the timing has to be right for it to make sense for a child to contribute to an RRSP. If the plan is to put the money in only to take it out soon, that doesn't make sense. But it is a good idea for a child to contribute if the following applies-- [A] the investment is left in the RRSP until retirement, OR [B] the investment is left in the RRSP until a homebuyer's plan withdrawal to buy a house.

Comments about the above--in the case of option [A], this allow years of tax-free compounding and some control over when the money is taken out so as to minimize the tax rate on the withdrawal. It makes sense to make and deduct an RRSP contribution when income is relatively high [see my comments below], and take money out of the RRSP when income is lower since total income determines rate of tax. And, of course, since your RRSP investment should double about every 8 years, the sooner one starts, the bigger the nest egg! In the case of option [B], this allows the money to come out tax-free with repayment of the money you've borrowed from your RRSP over a maximum of 15 years.

One important point. When you file the child's tax return, after having made an RRSP contribution and with the contribution receipt in hand, complete Schedule 7 of the tax return to report that an RRSP contribution has been made. Attach a copy of the contribution receipt to the tax return. The Schedule 7 also allows you to tell the CRA whether you are going to deduct the RRSP contribution from income this year or in a future year. Remember that you don't have to deduct an RRSP contribution from income in the year that you made the contribution.* Now, why would you not deduct the child's contribution this year? The child probably is paying little or no tax. But the child will eventually grow up and make a good salary presumably. When that happens in the future, then is the time to deduct the contribution from income to maximize the tax refund. Between now and then, however long that is, you can wait to make the deduction.

In the meantime, the RRSP contribution made by the child will grow tax free. Finally, if your child is like mine, you may let them take any earnings they made and spend it on something they need or want. So who's going to provide the money for the RRSP contribution?. You might first want to teach the child about RRSPs and convince her to take 18% of what she earned and put it in her RRSP. Or you, a grandparent, uncle or aunt might feel inclined to contribute the 18% knowing that a $100 today can double six times to $6400 by the time the child retires. If you have any questions, please let me know.

Cheers!

Tom

Notes--*by filing the Schedule 7, every future Notice of Assessment will indicate on the bottom the total of any contributions made but not yet deducted from income. This will help you to remember to deduct the contribution at an appropriate time.

--there is a special procedure to follow when opening an RRSP for a minor child, so please consult your financial advisor should you decide to open one.

copyright 2007

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
email: tom.buck@ethicalfootprint.ca