November 2011
Turning the corner on the last quarter....



Heading into the last couple of months for the year, it is RSP Season again.  To contribute or not to contribute - that is the question.  With many choices, each with their pros and cons, remember, we are always here for a discussion on their suitability.  There are less than 60 days before Christmas, but there is always time to meet with us and review your portfolio.
Take some time to shop.  Take some time to dine.  But above all...take some time for you and your family.
Thank you for letting us be of service to you,
Peter      Richard      Claudio

Hesitating to make an RRSP contribution?

 by Sonali Verma, Globe and Mail


If you still haven't made your RRSP contribution, you're not alone. Over the past five weeks, we've heard from Canadians of every stripe who are hesitating to write the cheque, for many reasons. Should I pay down my mortgage or other debt first? What about a TFSA instead? OK, I'm willing to do it, but how do I even start figuring out where I should be investing my RRSP money?


If you're still on the fence, take the leap of faith, says Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada Inc. She looks at some hurdles to contributing -- and how to overcome them.


1. You're carrying debt. You don't need to be debt-free to start saving for your future. "If you do a bit of both, paying down debt and saving for your retirement, you will likely be better off in the long run," Ms. Lovett-Reid says.


2. You don't have money to make a contribution. "Consider borrowing to invest in your future," she says, because your investments can grow without being taxed immediately.


3. It's almost the deadline and you don't have much money set aside. "Make a contribution, no matter how small, before the deadline," Ms. Lovett-Reid says. "But next year, don't wait until the last minute. Take advantage of a pre-authorized purchase plan and see how regular investments can compound over time."


4. Why bother? Small contributions don't add up to much. Don't believe it. "Every dollar counts: Even if you don't have much discretionary income, it's still worth contributing. Through the power of compound interest, you may have generated more savings than you expect when it's time to stop working," she says.


5. You don't know exactly how you want to invest your contribution. "Contribute now and decide what to invest in later," Ms. Lovett-Reid suggests. You can temporarily park your money in a cashable GIC or a daily interest savings account before the deadline, and then take the time to decide exactly what you want to do with it. "Don't forfeit the tax incentive by waiting for next year simply because you can't decide how to invest."


Volatility Becoming the New Normal

by Dave Patterson 


In recent weeks, global equity markets have become extremely volatile with market swings reminiscent of the credit crisis of 2007 - 2009. For the third quarter ending Sept. 30, the S&P/TSX Composite Index was down more than 12.6% and has fallen for the past five months in a row.

While the magnitude of the loss is disturbing so too is the level of day-to-day volatility that investors have experienced recently. Out of the 63 trading days in the third quarter, there were 11 which had moves of more than 2%. In other words, nearly one in five trading days was up or down more than 2%.

Globally, it is a very similar story with the S&P 500 dropping more than 14.3% in U.S. dollar terms and the MSCI EAFE Index was down 19.6%. While the equity markets sank, fixed income investments, particularly the traditional safe haven government bonds rallied, with the DEX Universe Bond Index moving higher by 5.1%.

Understandably, many investors are growing increasingly worried about this continued volatility and are uncertain regarding the future. First, let's take a look at the issues that are driving the volatility and uncertainty. There are three main issues overhanging the global economy at the moment. They are:

The European Sovereign Debt Crisis - Perhaps the most pressing issue at the moment is the European debt crisis. With Greece on the verge of default and other Eurozone nations such as Portugal, Ireland and Spain set to join them, the global economy is on tenterhooks. Over the past two years, there have been a number of austerity measures and bailout packages proposed, however, the progress towards a proper resolution has been slow. Pessimism is ruling investor sentiment and markets are swinging wildly on the daily news flow out of the region.


What is certain is that the situation will have to be resolved. What that resolution will look like is up for debate. Many experts are expecting a restructuring of Greek debt, which will prevent a full scale default. A default could have serious repercussions, particularly to the global banking system as many banks around the world hold Greek bonds which could be worthless overnight.  While default may be an option, many parties are working to ensure that doesn't happen with some calling for the International Monetary Fund (IMF) to step in and play a role making the whole process as orderly as possible. But until this situation is fully resolved, markets will continue to be extremely volatile, selling off sharply on the hint of bad news and rallying higher on good news. European financial stocks appear to be the most vulnerable in the near term, although should a satisfactory resolution be found, they are also likely to experience a significant jump in value.


Fear of a Recession in the Developed Markets - While the Eurozone debt issues dominate the headlines, the threat of a recession in the developed world is weighing on investors' minds. In the U.S., the risk of a recession continues to rise as the housing market stagnates and job growth, while positive, is not strong enough to spur hope for a speedy economic recovery. The Federal Reserve has stated that there are "...significant downside risks to the economic outlook", further adding to investors' fears.

The Fed had previously utilized a tool known as Quantitative Easing (or QE2) which was the purchase of $600 billion of U.S. government bonds as a means to injecting liquidity into the monetary system with the goal of stimulating economic growth. The program ended in June of this year and thus far the Fed has been reluctant to introduce another round of quantitative easing for fear of spurring inflation within the economy. Instead, the Fed has brought out another tool from their stimulus toolbox known as Operation Twist which is essentially the selling of short term bonds and the simultaneous purchase of longer term bonds. If successful, this will result in the lowering of longer term interest rates in the economy which is expected to help spur economic activity.

While the Fed may want to twist again, markets didn't really want to dance and sold off sharply after the announcement. Further, Goldman Sachs recently downgraded their growth assumptions for the global economy to 3.5% for 2012, down from their previous estimate of 4.2%, while predicting that there was about a 40% chance of a U.S. recession. Until the housing and job markets improve, the overall pace of economic growth is expected to lag. Canada, while in a much stronger position than the U.S. will likely escape a recession, but it is very likely that the pace of growth will slow.

A Slowdown in the Emerging Markets - Unlike the previous two issues, the slowdown in the emerging market is more of a deliberate, man made issue. Many of the countries in the developing world, particularly China, have been growing at a pace which is unsustainable over the long term. The Chinese government has been actively trying to slow the pace of economic activity to a more sustainable level. Recent data suggests that they have been successful, as a pronounced slowdown in manufacturing and housing has occurred. While the short term impact of a slowdown, namely a cooling in commodity prices, may negatively impact Canada, the more sustainable growth rates will allow for China and the emerging markets to continue to be drivers of global growth into the future.   While there are issues dragging the global economy, there are a number of positives for the markets. Perhaps the biggest positive is that many corporate balance sheets remain strong. Companies are generating decent earnings, and many are sitting on significant piles of cash, which will help them withstand any short term setbacks. Further, according to Gerry Coleman, manager of the CI Harbour Fund, we are witnessing "...brisk merger and acquisition activity with takeovers at large premiums to market values and record levels of insider buying." Additionally, while many economists have cut their growth forecasts for the coming year, it is important to note that even when reduced, the level of economic activity anticipated is still positive.


Bottom Line

So what does all of this mean to investors? Simply put, more of the same, at least for the remainder of the year and the first part of 2012. We fully expect that markets will continue to be extremely volatile for the near to medium term. For investors, it's "gut check" time - time to revisit their portfolios and make sure that they are comfortable with the level of volatility of their investments.

Within portfolios, investors should emphasize quality, both in fixed income and equity holdings. While the longer term outlook for fixed income is bleak, near term, with interest rates likely on hold until mid 2012 or later, high quality fixed income will provide a good buffer against the volatility of the equity markets. Investors should focus on Canadian government and high quality corporate bonds. (Examples in the fixed income space include high quality bond funds like PH&N Bond or TD Canadian Bond, both of which contain high exposure to high quality corporate bonds.


Within the equity portion of their investments, investors should again focus on quality investments - funds which invest in quality companies with strong balance sheets that have high dividend yields. Examples in the Canadian equity space include CI Harbour, IA Clarington Canadian Conservative Equity and Fidelity Canadian Large Cap. In the U.S. equity space, examples include Dynamic American Value and CI American Value. In the Global Equity space, examples of high quality funds which should hold up well in volatile environments include Ivy Foreign Equity and Renaissance Global Markets.

By focusing on quality, investors can help to manage some of the short term volatility while still providing an opportunity to generate some capital growth.

Consider the easy way out when dealing with the Cottage.

 An Article by Tim Cestnick


There's nothing like Grandpa spending a little time with the grandkids, teaching them how to fish. This past week, my kids spent some time with their Papa John doing just that.

"What did you learn from Papa?" I asked after they returned with quite a few fish to show for their efforts.

"It was easy Dad!" Winston said. "All you have to do is go to that trout farm up the road and pay the man some money. I caught four big fish in five minutes!"

So my kids now think that all fish swim in schools of a billion, crowd together just beneath your line, are starving all the time, and can be caught with just about anything that will stick to your hook. Well, there's something to be said for doing things the easy way. When it comes to dealing with your cottage in your estate planning, sometimes the best approach is taking the easy way out.


The issues:

Consider Ruth. Her husband Carl died a few years ago. Ruth is now contemplating what to do with the cottage. She doesn't use it much any more. Her son Mark goes up all the time with his family, but Ruth's two daughters don't spend much time there at all.

The cottage means the most to Mark, but Ruth wants to leave her estate to all three kids equally. She has no other assets to divide up when she's gone. Now, most accountants and lawyers will agree that leaving real estate to all the kids equally can be a recipe for disaster.

When the kids own the cottage jointly, they'd better be able to agree on everything, including, among other things, sharing of time, paying for upkeep, and deciding when to sell. This will be tough for even the closest families, and hard feelings almost always result.


The options:

What are Ruth's options?

*     Sell it now. Ruth could sell now if she wants to avoid paying for upkeep of the cottage. She could then gift the proceeds to her kids today. She may even give Mark the right of first refusal to buy it. Her principal residence exemption (PRE) could shelter the sale from tax.

*     Gift it now. Ruth could gift the cottage to all three kids today. This gift will be treated like a sale for tax purposes, but her PRE could shelter the transfer from tax. She could act as mediator to resolve disagreements while she's alive. But what about after she's gone? Disagreements can arise.

*     Transfer to a trust. Ruth could transfer ownership to a trust. This is not much different for Ruth, however, than gifting the cottage today and maintaining control and decision-making powers while she's alive, except there are added costs and tax complexities.

*     Transfer to a non-profit corporation. This idea creates an effective governance structure for the cottage, but isn't for everyone because it adds costs and complexity.

*     Leave it in your Will. Ruth could leave the cottage equally to her kids in her Will with the requirement that the place be sold and the proceeds be divided equally. She could give Mark the right of first refusal to buy the place.

At the end of the day, the easy way out may be best. That is, to sell the cottage today, or make sure it's sold after you're gone, and divide the proceeds. If one child seems like the natural person to own it, give him or her the right of first refusal to buy it at fair market value.


Issue: 11
Financial Markets
In This Issue
Hesitating to make an RRSP contribution?
Volatility Becoming the New Normal
Consider the easy way out when dealing with the Cottage
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Peter Bailey
Worldsource Financial Management
272 Lawrence Avenue West, Suite 203
Toronto, Ontario M5M 4M1