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| "Financial advisor Adrian
Mastracci urges investors to perform a year-end review during
the holiday season." |
By Jan-Christian Sorensen
North Shore News
Business
Sunday, December 2, 2001
Christmas means many things to many people.
For North Shore News financial columnist Adrian Mastracci,
it first and foremost means a time for family, but in a financial
sense, it's also a time to reflect on the past year and plan ahead
for the future.
The future, he says, is the most important consideration in formulating
any sort of a successful investment strategy.
"Investing is not about today. Investing is about what it's
going to be like five or 10 years down the road. Managing money
is a marathon, not a 100-yard dash. The proven and consistent approach
to create, grow and retain your wealth is with the long-term investment
perspective, and a year-end review is an excellent time to initiate
changes," says Mastracci, president and fee-only investment
counsel at KCM Wealth Management.
He urges all investors to do a checkup this Christmas season to
take stock of what's working and carefully consider getting rid
of what's not.
Quite a few investors, and perhaps too many of them -- especially
in the last couple of years where we've had a long drawn out market
-- become very distracted by the noise and the flavour of the day
and they devote a lot of time and a lot of effort to selecting the
stocks and selecting and mutual funds they ought to be in but not
enough time on the investment strategies that they should follow
to reach the goals," says Mastracci. "As long as investors
make stock and fund selection their first priority, they will have
a poor investment experience."
"All too often investors see the top-10 must have stocks and
funds and suddenly they just jump to them and quite often those
things have been the winner of last year or the year before and
they're not necessarily going to be winners of the next year."
Mastracci offers 10 tips for enhancing the nest egg as investors
draft and review their year-end checklists:
1. Review your investment plan
Take the time to review your investment game plan, it contains all
the policies and strategies you will follow to reach your chosen
destination. You want to be right more often than you are wrong.
If you're unsure about the plan's appropriateness, resolve to pay
for professional counsel.
2. Focus on asset allocation
Forget market timing and picking your favourite stocks. These strategies
don't work often enough. The 1990 Nobel Prize studies concluded
that asset allocation decisions have the greatest impact on your
portfolio returns. They explained, on average, 94% of the contribution
to total return. Clearly, if this is not the focus in your investment
portfolio, it ought to be.
3. Pay yourself first
Start as soon as you can. Discipline yourself to a savings program
that you can stay with over time and don't get in over your head
with debt. Regularly allocate some of your earnings to savings,
perhaps by automatic deposit. Aim for 5% to 10%.
4. Tax loss selling
Determine if your current portfolio will meet your expectations.
If what you are doing now doesn't seem to steer you towards your
chosen goals, such as financial independence or retirement, then
it's time to make some changes. If you entertain tax loss selling,
don't just sell something to realize a loss. Act in context of your
overall portfolio and how the individual security fits your investment
plan.
5. RRSP deposits
Don't wait until the first 60 days of 2002 to make your RRSP deposits
for 2001 and for unused RRSP contributions from prior years. Even
if you don't want to take the deduction in 2001, at least the money
will begin to compound earlier in time. If you don't have sufficient
cash for the deposit, you can borrow the money or contribute eligible
assets to it, such as stocks and mutual funds. However, be careful
of existing capital gains or losses on the contributed assets.
6. RRIF if you turn 69 in 2001
The youngsters turning age 69 in 2001 must convert their RRSP into
a RRIF not later than December 31. Eligible RRIF investments are
the same as the RRSP, hence, investment strategy need not change
if it's appropriate. The RRIF withdrawals begin in 2002 and are
fully taxable. You may elect to receive your RRIF payments based
on the age of the younger spouse. All RRSP deposits must also be
made to your account before you convert to a RRIF or, if applicable,
to a spouse who is younger than you.
7. RESP deposits
You may contribute for 2001 to a Registered Educational Savings
Plan for a child not later than December 31. The annual maximum
is $4,000 per child, to a lifetime maximum of $42,000. Keep in mind
that the RESP deposits are not deductible for tax purposes. The
federal government will also assist the RESP with a grant of up
to $400 per child deposited into the plan.
8. Bonus deferral
Those fortunate to be receiving a bonus in the near future, may
ask the employer to consider deferring its payment to you until
January 2002. That defers the income tax on the bonus for another
year and you may be taxed at a lower rate. That's real a bonus!
9. Deductions and tax credits
Make sure you deduct all qualifying expenses paid in calendar 2001.
These include interest costs, professional dues, alimony, maintenance,
child care costs, investment counsel fees, safety deposit box and
accounting fees. Some of the outlays result in tax credits on your
2001 income tax return. Hence, review tuition paid, political contributions,
charitable donations and medical expenses.
10. Business owners
Review your vision for the business succession and the use of the
$500,000 capital gain exemption for qualifying small businesses
and family farms. The full exemption can save up to $114,250 of
taxes in 2001 or $109,250 in 2002 at B.C. rates. If you sell an
eligible small business and buy another one, it's possible to defer
the tax on up to $2,000,000 of capital gain.
Also, if your business employs family members, consider paying
their salaries before the end of 2001. This provides them with CPP
contributions in 2001 and RRSP room in 2002. Review your own remuneration
mix at the same time.
The tax department now allows employers to provide gifts to employees
up to $500 per year. The gift is not taxable to the employee and
the cost is deductible to the employer.
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