Here’s what caught my attention this week:
Interested in investing in gold? Look at Gold and the Fibonacci retracement Tool.
The Credit Toolbox is explaining how to avoid major mistakes with credit cards.
Bargaineering is telling you how to pick the right financial planner.
I really liked this article about how to make your own luck over at Get Rich Slowly.
There are still companies able to beat analyst’s expectation! Intelligent Speculator found that Amazon was one of them!
The Guardian is dressing up a list of people responsible for our current economic crisis.
Sick of getting beating up by the market? ABC of Investing is talking about TIPS (Treasury Inflation Protected Securities).
If you are thinking of doing a Smith Manoeuvre, you should definitely what happen with the Lipson Case over at Million Dollar Journey.
Four Pillars is looking over the 2009 Canadian Budget.
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I meet several clients wanting to avoid any other downturn in the market. For their new RRSP contribution, they want to have something that won’t fluctuate much. While I am convinced that this is the right time to invest in the market in order to benefit from the 2008 drop, I also believe that the best investment strategy is the one that makes you sleep at night 😉 So here are a few options for people who want to secure their investment portfolio.
Make sure that you are well diversified in your investments
The very first thing to slow down the fluctuation from one investment statement to another is definitely to review your existing portfolio. Some people think that they have a well diversified portfolio because they have a balanced fund. Make sure that your fund is not only diversified among one country. I have seen many balanced portfolio showing 50% in Canadian fixed income and 50% in Canadian equity. If it’s your case and the Canadian market is not increasing next year but the American market is… you won’t feel any improvement in your investments 😉
Make a bond ladder
If you really want to go the fixed income route, you should not invest all your money within the very same GIC or bond. You should build an investment plan with at least 5 terms (1 year, 2 year, 3 year, etc.). Therefore, you will be able to renew a part of your portfolio every year and hope for better fixed interest rate (because they are pretty low these days!).
If you have enough money (more than 50K, but you are better off with 100K +), you may find a broker that will be able to offer not only GIC’s but provincial, municipal and corporation bonds. This should increase your overall return by at least .50% 😉
Then again, I am not a big fan of linked notes. However, if you can’t stand market fluctuations and you can’t stand low interest rate either, I would go this route. The linked notes guarantee your capital and offer a better yield potential since it is related to the market. It is possible that you don’t make a penny at renewal date. However, you have much better chance of hitting 5% to 7% return if you take it now for 5 to 8 years (regular terms for linked notes).
I already wrote about this investment strategy (just click on the paragraph title if you missed this post). This is a mutual fund that allows an investment plan B as the company is offering you the value of your fund or a life income based on your capital plus 5% per year with the company. While you will still see the fluctuation on your investment statement, you are guaranteed of a minimum pension at retirement.
I think this gives you a few good investment options. So if there is any other investment strategies that will reduce the risk or volatility, please share is with other readers 😀
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A few days ago, I explained the split dollar strategy and give an example of this tax strategy showing how critical illness insurance can help you out getting money out of your corporation. However, critical illness insurance is more than a tax saving tools. Actually, several people like the idea of the insurance itself once explained correctly. The problem with insurance (and I have the same reflex), is that we stop listening as soon as we hear this word. No wonder in Québec they started to call insurance rep, financial securities expert 😉
The Critical Illness Insurance Explained
Critical illness insurance is probably the easiest type of insurance to understand. Even better, there is no ambiguity as of to know if you will get your check or not.
When you subscribe to a critical illness insurance contract, there will be a list of about 23 illnesses in the contract. If you ever get a diagnosis of any of these critical illnesses, you receive your check right away. Plain and simple 😀
You can use this money for whatever you want; spend times with your family, get the best health care possible, pay off your debts, etc. Once you get the money (that is tax free like a life insurance policy), you are free to use it as your will.
The good news is that people can now survive several critical illnesses such as cancer and heart attack.
What if I never get sick?
For a small amount added to your insurance premium, you have the possibility to have all the premiums fully reimbursed after 15 years (see the split dollar strategy for more details).
Also, you can pick the option of having your insurance premiums reimbursed upon death as well. So basically, the critical insurance is almost free (we’ll get to this point at the end of the post).
Another great feature that can be offered through critical illness is to get access to Best doctors. This is a company that will take your file and find the best hospital in the world for your specific illness. They will book your flight, car and hotel room along with book your appointment with a doctor in this hospital.
This service is obviously quite expensive but when you just receive your critical illness insurance check, you can then afford it!
An insurance that is almost free?
Well, there is still a cost even if you get all your insurance premiums back. This is the cost of inflation. If you pay $3,000 per year for 20 years, you will receive $60,000 upon cancellation (or death). If you would have invest 3K at 2% (let’s consider the inflation rate low ;-), your amount with inflation protection would have been almost 73K.
Therefore, you can calculate that the real cost of a critical illness in this example is about $650 per year. You can consider that your cost is higher considering that you could have invested this 3K in the market and get 7% per year. Therefore, your cost of opportunity would be 63K (123K – 60K)…
Disclaimer: I’m not an insurance agent and I do not sell any type of insurance, critical illness insurance included. I’m only reporting information on this blog. Please book an appointment with an insurance professional in order to assess your needs.
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Hey, February is getting closer and your banker will surely call you (if it’s not done already!) in order book an appointment and invest into a registered retirement saving plan. The market looks like shit for the past 18 months and he has the guts to ask you to put more money in it? Yeah right! Hahaha! You may want to reconsider a few RRSP investing strategy before you make your final decisions.
Linked notes in your RRSP?
I am personally not a big fan of linked notes (you can read more on the topic here). However, it has some advantages if you have been roughed by the markets lately. If you do not consider investing in mutual funds, indexes or other product related to the market due to their volatility, you might like linked notes. They guarantee your capital 100% and offer a yield related to the market. They are usually offered for 3 year and older (up to 8 years). Since this is an investment for your retirement, you don’t really have to worry about the investment term.
Cut the fees in your RRSP account
If you are young and still accumulating on a monthly basis, this strategy might be difficult to apply. However, if you have more than 100K invested in your RRSP account, you will love this strategy.
Instead of paying fees to have your fixed income managed you can do it yourself or having your financial planner / broker do it for you for 0% MER’s! By doing a bond ladder will avoid unnecessary fees on something that will give you only 4 to 5% yield anyway. So separate your RRSP account into 2 part according to your original asset allocation: a part with 0% MER’s with a bond ladder and the other part fully invested in the markets (Canadian, American and international markets).
Get a rrsp loan to catch up unused contributions.
This is an easy and simple way to boost your RRSP: force yourself into a periodic investment 😉 You will have to do it backward and contract a loan to create the saving habits you it is better now than never 😉
Once your rrsp loan is reimbursed, keep the same amount and invest it directly into your RRSP’s. Therefore, you won’t have worry about your RRSP contribution and retirement. You will be set on semi automatic pilot 😉
What is your RRSP strategy for 2009? Are you going into index funds? Directly into ETF’s? GIC’s and corporate bonds?
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A few weeks ago, I brought the idea of withdrawing money from a corporation or a holding company without having to pay taxes through The Split Dollar Strategy. I actually lied about the whole thing… you will have to pay taxes…. About 3% in the example that I will show you 😀 hehehe! 3% of taxes compared to appreciatively 33 to 36% if it would have been a dividend income or 45% to 48% if it would have been an interest or business income. Not bad, huh?
So here’s the deal: You have a corporation paying a $5,000 yearly premium for critical illness insurance. For a young man of 37 years, it could roughly represent an insurance of 200K if he would get a critical illness during the process.
So the premiums include the following:
– A critical illness insurance of 200K payable upon diagnosis (23 listed illnesses such as heart attack, cancer, etc.)
– Premium reimbursement in the end of the policy owner upon death of the insured
– Premium reimbursement option in the end of a named beneficiary (the individual owning the company in this situation)
Every year, the individual will have to declare a taxable benefit of $297 for being the beneficiary of the insurance premium reimbursement (here’s come the split dollar strategy ;-0 ).
So 15 years from now, you are still not ill (let’s hope for it!) and you cancel your critical illness insurance.
You will receive a nice cheque from the insurance company of $75K (so 5K times 15 years) free of taxes! Really? Not really 😉 You actually paid a big $142 every year in taxable benefit provided by your company through the critical illness insurance. So total paid in taxed over 15 years is $2,138 ($142 X 15 years). 2K on 75K… 2.85% in taxes 😀
I actually run the numbers to see what would happen if you invest the 5K every year within the company on the stock market and pay yourself a dividend (taxed at 33% for this example) after 15 years.
Well, in order to receive $72,862 (75K – $2,138 in taxes) from your company at a 33% tax rate, you need to have $108,750 within your company. If you invest $5,000 over 15 years within your company at a after tax yield of 5%, you will get your 108K. However, in order to make 5% after tax, you need to make about 7.15% (let say that you are taxed at 30% within the company). So if you are 100% that you will make more than 7% in the next 15 years, you don’t need this strategy 😉
Personally, I would certainly consider putting a part of my company liquidity into it ;-). Then again, I do neither recommend nor selling the Split Dollar Strategy. I am not an insurance licensed representative and I am simply telling you that you might want to look at the Split Dollar Strategy closer with an expert and professional that knows your personal financial situation.
I hope you enjoyed the demonstration of the split dollar and please comment if you have any questions 😀
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