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By Ray Turchansky
Edmonton Journal
Thursday, December 28, 2006
As the dust settles at year-end, with tax-loss selling and mutual fund distributions accounted for, people have a great opportunity to make a few financial New Year's resolutions.
Adrian Mastracci, fee-only portfolio manager at Vancouver’s KCM Wealth Management, says, "If you're approaching or entering retirement, capital preservation is paramount."
1. TAKE STOCK OF WHERE YOU ARE
As your year-end investment and registered account statements come in, make a list of all your assets and figure out how much each has increased or fallen during the past year. Include dividends and distributions.
Perhaps the hit you took on the income-trust taxation announcement wasn't that bad when you look at the yearly performance. Conversely, maybe those shares in Excursions To Pluto Ltd. didn't re-cover like you hoped.
2. REBALANCE TO GET WHERE YOU WANT TO GO
Knowing your net worth and how much money you need to retire lets you plan how much or how little investment risk to take in the interim.
Canadian stock markets in particular have done very well the last four years, while fixed-income vehicles have suffered.
Your portfolio may now be grossly overweight in resources and financial services, leaving you vulnerable to a downturn in those areas.
Adrian Mastracci, investment counsel with Vancouver-based KCM Wealth Management Inc., dug up the following advice from a German investor named Jacob Fugger the Rich, who lived from 1459 to 1525:
"Divide your fortune into four equal parts: stocks, real estate, bonds and gold coins. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate. During deflation, you lose on real estate and win on bonds. Your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back to the four equal parts."
3. LIMIT YOUR LOSSES
Getting emotionally involved with your investments often results in hanging on to fallen stocks and mutual funds and income trusts long after you should. Set some stop-losses, mentally if you're disciplined enough and physically if you're not, so that you sell any investment that loses 20 per cent, or whatever drop you are willing to live with.
If you're approaching or entering retirement, capital preservation is paramount. If an investment loses 50 per cent, it has to gain 100 per cent just to break even. If the loss is 60 per cent, the gain has to be 150 per cent to break even. Says Mastracci: "Now those are miracle turnarounds. The bad news is that I can't recall many of them."
4. DEAL WITH YOUR DEBT
One of the greatest deterrents to wealth accumulation is debt, and specifically the interest you pay to service that debt, 18 to 22 per cent with many credit cards.
Jim Yih suggests the following steps: Pay more than the minimum monthly amount on each credit card and put the most on the card with the highest interest rate; consolidate debt using low-interest credit cards or lines of credit; curb your spending; destroy old cards with high interest rates; and once you get ahead, try to pay off the monthly balance for at least three months.
5. FIND OUT YOUR FEES
A huge drain on investment returns is fees. Check out the management expense ratios and loads and deferred sales charges of your mutual funds, and consider index funds or exchange traded funds instead. Know what commissions your stockbroker charges and check out discount brokers. Institutions seduce people into wrap accounts with fancy names, but may charge 2.5 per cent of your portfolio annually. If you have segregated funds or principal protected notes, how much is the insurance component costing you? Is your financial adviser paid commissions and trailer fees, or a percentage of your assets, and in either case how much?
6. UPDATE YOUR WILL
You should update your will every five years or whenever there's a "life-altering event," such as a marriage, divorce, birth of a child or grandchild, death, or even a move to a new house.
Your will should also reflect desired changes in executors or beneficiaries, rebalancing of assets including a change of residence, and changes in business involvement.
7. TOP UP REGISTERED PLANS
This is also a good time to make sure your registered retirement savings plan and pension plan beneficiaries are up to date. And consider starting registered education savings plans for your children or grandchildren, or else maximizing existing contributions to get the most out of federal and provincial grants. Make sure your children are registered for the Canada Child Tax Benefit and provincial plans.
8. BE AWARE OF PERSONAL FINANCE CHANGES
Federal budgets and economic statements, plus provincial budgets, bring about numerous changes that start in a new year. Also, items ranging from tax brackets to social benefit clawbacks are indexed to inflation and adjusted at the start of each year.
Knowing these new limits can help you optimize your registered retirement savings plan contributions, and your RRSP withdrawals to avoid clawbacks. You should also know what receipts to keep to take advantage of new or increased deductions and tax credits.
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