August 2014
Preparing for the second half.




We hope that you have had a pleasant Summer so far. As we move in to the second half of the year, we are beginning to immerse ourselves back in to a more active role when it comes to our investments. This month's collection of articles will help guide you as you review your holdings.


Feel free to give us a call to discuss your portfolio.


Be well.



Peter, Claudio and Joanna

First Half Review - Investors Rewarded with Strong Gains

by The Perspective - Summer 2014


The first half of 2014 is now behind us! What started off as a banner year for Canadian athletes in the Sochi winter Olympics (where Canada won 25 medals including ten gold medals) has continued on the venerated grass courts of Wimbledon where young Canadian tennis players Milos Raonic and Eugenie Bouchard broke through to the semi-finals and finals respectively.  While Canadian athletes reaped the rewards of their efforts during the first half of 2014, so too have Canadian investors who in the middle of June finally saw the S&P/TSX index close above its pre 2008 credit crises high. 

In fact, thus far Canadian equities have led the way in 2014. Tthe S&P/TSX Composite Index gaining 12.86% (Guardian Capital LP), handily outpacing most other developed markets such as the S&P 500 and MSCI world's indices which were both up 7.54% and 6.58%, respectively (Guardian Capital LP). 

While the Canadian economy has continued to gain traction there is some concern about the US economy which, due to an unusually harsh winter suffered a drop in economic output in the first quarter of the year. This drop in economic activity in the first quarter was largely caused by weakness in the housing sector, net exports and healthcare spending and has changed course in the second quarter which has seen improved economic data led by higher employment. Financial markets are nonetheless still wrestling with the US economies ability to sustain growth especially with the continued tapering of quantitative easing as the US Federal Reserve once again reduced monthly bond purchases from $45 billion to $35 billion (in June). This is now less than half the $85 billion a month it was pumping into the economy in 2013. 


While the Sochi Olympics captured our attention in the first quarter, geo political risks led by Russia's efforts to reclaim the Crimean Peninsula from the Ukraine captured our attention in the second quarter as did the renewed fighting seen in Iraq.  

In Europe, the second quarter was dominated by elections and saw the rise of anti-Europe parties throughout the European Union especially in France where the "Anti-EU National Front"  gained 26% of the vote.  June also saw the European Central Bank (ECB) cut interest rates to record lows and announce that for the first time it will begin charging banks on overnight deposits, in an attempt to force them to increase lending to smaller businesses. While the ECB stopped short of promising a US style Quantitative Easing program it did announce its intention to do more in order to stimulate economic growth.

Meanwhile, China has also struggled as the economy continues to be weighed down by the housing market. In a recent survey by Bloomberg, economists expect that GDP growth in China will be the lowest level in 24 years.

Although, the sustained efforts of the world's central banks in providing monetary stimulus to financial markets appears to have positioned global economies to continue upon a path of slow recovery, there are still risks. Perhaps the biggest of which is the lack of volatility across asset classes which can sometimes be interpreted as over optimism amongst investors. As always optimism needs to be paired with balance.

Why Options Mean Freedom When it Comes to Retirement

by Robb Engen- August 2014,


Saving outside of my defined benefit pension plan will give me several options to consider when it comes to retirement.  To me, options mean freedom, even though I'll be faced with some tough choices.  Here's why:


According to my plan provider, I should be able to retire at 57 and receive an annual pension of roughly $64,800.  That will equal approximately 55 percent of my average salary in my top-5 earning years.


(Note that I contribute nearly 12 percent of my salary towards the plan each year, lest anyone think these retirement benefits are conjured out of thin air).


I've also built up a decent sized RRSP portfolio - over $100,000 before my 35th birthday.  If left alone with no further contributions, and assuming an 8 percent annual return, this portfolio will be worth $543,000 by the time I turn 57.


To stay in a 32 percent tax bracket (22 percent federal, 10 percent provincial) I could withdraw up to $23,000 (in today's dollars) from my RRSP to give me an annual salary of $87,800.


The strategy - known as an RRSP meltdown - would allow me to withdraw funds from my RRSP on my own schedule before mandatory withdrawals kick-in after age 71 that might have negative tax consequences.


Melting down the RRSP early would also allow me to defer OAS and CPP benefits to age 72 and 70, respectively, and receive a 36 and 42 percent benefit for doing so.


That leads to my tax free savings account (TFSA), which is not currently funded. The plan is to start topping up my TFSA once our car payment ends in 2016. But even if I haven't completely maxed out my TFSA by the time I retire, I could start funnelling RRSP withdrawals into my TFSA to build an eventual tax free income stream that won't affect eligibility for OAS benefits.


I'd also like to continue writing and offering financial planning services in retirement, income that I can keep inside my small business for preferential tax treatment.


In order to make a detailed retirement plan, you'll need to have a good understanding of your expenses as well as your desired income target.


That can be impossible to determine two decades or more in advance, which is why I'm focused on generating as many income streams as possible to give me options and freedom to choose my retirement date.


 View original article here.

Learning From the Financial Mistakes of Others

by Sarah Milton, August 2014 -


"Learn from the mistakes of others. You can't live long enough to make them all yourself." - Eleanor Roosevelt


A few years ago, I embarked on a business venture with a friend. As part of our due diligence we made it a point to talk with as many people as possible who had found success in the area we were focusing on in the hopes of learning strategies that we could duplicate but we also sought out people who had created a similar product and been highly unsuccessful. Our thought was that, in learning about their mistakes and consequent challenges we might be able to avoid making those same mistakes ourselves. As it turned out, we received some great mentorship from those who had been successful but we learned some of the most valuable lessons from hearing the stories of the less fortunate entrepreneurs. When it comes to finances, the most powerful lessons often come from the financial mistakes we make and we can learn a lot from these negative experiences.


A few weeks ago there was an article in the family finance section of the Financial Post which detailed the sorry story of "Rebecca", a 68 year old civil servant who found herself deep in debt with no savings after making two disastrous investment decisions. There are a lot of lessons to be learned from Rebecca's experiences. Here are the three financial mistakes that resonated most with me:


Beware of Taking Risk to Catch Up on Retirement Savings:

The driving force behind Rebecca's decision to invest in two high risk business opportunities (a real estate development that failed and a mining venture which turned out to be fraudulent) was realizing that she hadn't saved enough money to maintain her preferred lifestyle in retirement. This is not a rare thing; one of the most common regrets I hear expressed by people in their 50s and 60s is the wish that they had saved more and spent less in their younger years. Realizing that their savings aren't enough often prompts people to take far too much risk with their money at a time when they should be investing more conservatively. Some, like Rebecca, gamble on speculative ventures that promise huge returns, others leave their money invested in portfolios that are far too exposed to market risk in a bid to net an extra couple of years of good returns.


Investors in their 20s, 30s and 40s can learn great lessons from these investors' mistakes. The best way to build wealth is to do it steadily, over time. Commit to saving early and saving hard; your 65 year old self will thank you for it!


Don't Assume that CPP and OAS will be Enough:

CPP and OAS were never intended to be anyone's sole source of income in retirement but far too many people assume that the contributions they make to CPP over the course of their working life will generate enough income in retirement to support their chosen lifestyle. The reality is though, that unless your retirement lifestyle can be maintained on an average of $1116/month before taxes, CPP and OAS will not be enough. These programs were always intended to supplement our own retirement savings not replace the need to save but all too often, just like Rebecca, people have no idea how much they will actually receive from CPP until they get a letter just before they turn 60 outlining the details. By then, it's often too late to do anything significant when it comes to boosting their own savings.


Ignorance is only bliss up to a point; it's worth contacting Service Canada to ask for your Statement of Contributions so that you know exactly where you stand and how much you need to save to supplement what you'll receive from government programs.


Borrowing to Invest Can Be Risky:

At the point where Rebecca was confronted with the fact that the amount she would receive from her company pension combined with CPP and OAS would not be enough to support her pre-retirement lifestyle, the only assets she had were the $20,000 in her RRSP and the equity in her home. This is a precarious situation to be in because her only options for financing those investment opportunities involved cashing out her retirement savings and/or borrowing against the value of her home.


Fear and desperation often go hand in hand with poor decision making and this is especially true when it comes to making decisions related to finances. When an investment opportunity seems too good to be true, there's a good chance that it is. Leveraging can be a great way to boost your net worth but it's a strategy that should only be used after doing your due diligence, taking advice from qualified professionals and making sure that you fully understand and weigh up the risks involved. Rebecca did none of those things and she paid a heavy price for it.


One of my mentors credits some of his smartest financial decisions to conversations he had in his late teens with co-workers who were approaching retirement. Listening to these men talk about what they wished they had done differently and hearing their stories of friends who had built wealth in a number of ways inspired him to make choices over the past 40 years which have allowed him to build a solid financial foundation for himself and his family. Like him, I believe there is a lot to be learned from cautionary tales of financial misadventure; perhaps more than from tales of great success. What do you think?


View original article here.

Issue: 45
Financial Markets
In This Issue
First Half Review
Why Options Mean Freedom when it Comes to Retirement
Learning From the Financial Mistakes of Others

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Peter Bailey
Wealth Advisor
Worldsource Financial Management Inc.
272 Lawrence Avenue West, Suite 203
Toronto, Ontario M5M 4M1 

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