Don’t Hibernate - Accelerate Turning Fear Into Action

A Pre-Authorized Chequing Plan Pays

Human emotion can be an investor’s worst enemy. In the long run stock markets go up, but sometimes stock markets fall. Investors tend to buy stocks when they are priced high and avoid them when they are priced low (which is the opposite of how they should behave). A pre-authorized chequing (PAC) plan can help you ensure that when buying opportunities arise in the stock market, you are already set up to take advantage of them. In other words, a PAC plan helps take the guesswork out of investing.

For example, you can purchase any fund in the AIC family by making regular investments through an AIC Pre-Authorized Chequing (PAC) Plan. For a minimum initial and subsequent investment of $50 you can invest biweekly, monthly, bi-monthly, quarterly, semiannually or annually – whichever you're most comfortable with.

Once you set up your PAC plan, AIC will automatically debit your bank, trust company, credit union or caisse populaire account directly and use the proceeds to purchase your mutual fund investment(s) on the same business day.

By establishing a PAC plan, you can budget for your particular needs. Investing becomes “invisible” and you can take advantage of the “dollar-cost-averaging” concept of investing. This allows an investor to take advantage of price fluctuations and acquire more mutual funds investments when prices are down. The goal is to average the investment purchase price over the long term.

Benefits of a Pre-Authorized Chequing Plan:

Convenience – no need to remember to sign and send a cheque each month to invest
Flexibility – you can change or stop your plan at any time
Peace of mind – regular investing means not having to worry about investing at a “high” point in the market or missing an opportunity to invest at low prices – in effect, you will get a more “average” investment price
Predictability – a PAC plan makes budgeting for investing easier
Discipline – your PAC plan ensures that you don’t try to “time” the market, and it ensures you continue to invest when markets are down (when you have the best opportunities to invest at cheaper prices)

Here’s how it works

Let’s assume that you have a PAC plan that is set up to invest $500 every two months in your mutual fund account.

In the example above, by using a PAC plan and continuing to invest when the fund price was down, your total $3,000 investment would have grown to $4,042 which is more than it would have been had you instead waited to invest until after your fund’s price rebounded. AIC encourages investors to talk to their financial advisor to learn more about using a PAC plan to build wealth without thinking about it.

A Debt Swap Can Do You Good

Concerned about your investments and wondering what to do to help them in these topsy-turvy times? Here’s an idea courtesy of the Tax Smart team at AIC. It’s called the debt swap and here is how it works:

The idea is to convert bad debt into good debt.
First, there are three characteristics of debt you need to take into consideration:

1. The interest rate on the debt (high interest or low);
2. The purpose of the borrowing (for personal consumption, to acquire depreciating or appreciating assets);
3. Whether the interest expense on the debt is deductible for tax purposes.

Bad debt…
Take your credit card debt as an example. It’s generally the worst kind of debt. Why? Because the interest costs are high (often 19% or more), we typically use credit cards for personal consumption or to buy depreciable assets and the interest costs are not usually deductible for tax purposes.

Good debt…
Now, what about your home mortgage? It’s a better type of debt because the interest costs are generally much lower and you’re buying an asset that you likely expect to appreciate in value over time. You can’t usually deduct your mortgage interest (unless your home is used in your work), so you lose out on this front.

Best debt…
The third type of debt is borrowing money for the purpose of investing it. In this case, your interest costs are generally lower, you’re buying assets that should appreciate in value over the long term or generate income and the interest costs are generally deductible for tax purposes. This type of debt is arguably the best type of debt.

Executing the strategy
Consider selling some of your non-registered investments that have dropped in value, use the cash sale proceeds to pay down some of your bad debt, then take out a new loan to replace those investments you’ve liquidated.

The benefits of this strategy are clear:

1. You’ll trigger some capital losses that, to the extent that they can’t be applied against capital gains this year, can be carried back three years to offset capital gains and thereby recover taxes paid, or can be carried forward to offset capital gains and thereby save tax in future years.
2. You’ll manage to swap bad debt for good debt thereby making some interest costs tax deductible, creating tax savings.
3. You’ll have the opportunity to re-consider where you’re investing your money and to buy at a time when many securities are on sale.

Forget about holding on to what you currently own until it has gone back up in value to what you paid, if there are better opportunities available. Do you think the market knows how much you paid for your investment, and cares?

If it’s true that equity markets are going to provide mediocre returns over the next decade, then index funds and exchange-traded funds (ETFs), while inexpensive, many become the most expensive investments you own as a result. Active managers who focus on the best businesses, in growth industries, and buy at low prices, should be able to beat the markets and offer greater value to investors.

Contact your financial advisor today for more information.

Taking Advantage Of Dollar-Cost-Averaging

Tired of the media force-feeding you a daily ration of negativity on the current bear market? Then you’ll be glad to read this strategy on how to make a bear market actually work for you.

Dollar-cost-averaging means that you invest a fixed amount in your mutual fund at regular intervals, regardless of whether the market is up or down. This disciplined approach helps you to buy more units when they’re cheapest.

Here’s an example: An investor buys $3,000 worth of XYZ Funds on the first day of January, April, July, and October every year. The accompanying table shows the price per unit (excluding fees and commissions), the number of units purchased, the accumulated number of units in the investor’s portfolio and the average cost per unit held.

Date	Price per unit	# of units purchased	Cumulative # of units in portfolio	Average price paid per unit held
January 1	$15.50	193.55	193.55	$15.50
April 1	$20.50	146.34	399.89	$17.65
July 1	$14.25	210.53	550.42	$16.35
October 1	$28.75	104.35	654.77	$18.33

Copyright © by the Canadian Institute of Financial Planning – Used by permission

When the price per unit increases, the number of units that can be bought with a given amount of money decreases.

As the table shows, at a price of $15.50 per unit, $3,000 buys 193.55 units. If the price is $28.75 per unit, $3,000 buys only 104.35 units.

On October 1, the investor will have invested a total of $12,000 and will own 654.77 units. The average cost per unit at that time is $18.33.

The average of the quarterly prices of the units listed in the table is $19.75 ($15.50 + $20.50 +$14.25 + $28.75 divided by four). The investor has paid 7.19% less by using dollar-cost averaging.

A systematic, disciplined approach to investing
Of course, this strategy isn’t a guarantee of success. Some investors might have lost their nerve when the unit price fell to $5 and stopped investing – missing out on the best time to invest during the period.

On the other hand, dollar-cost-averaging does have certain benefits regardless of market conditions. Dollar-cost-averaging is a systematic, disciplined approach to investing. It offers a convenient way to build a significant investment portfolio because the amounts you invest remain constant, making it easy to budget for.

First and foremost
Before you begin dollar-cost-averaging, remember that investing always involves taking risks, and you can lose money no matter how you go about buying units. But, if you’re looking for a ray of hope in the storm of a bear market, then dollar-cost-averaging could be the solution.

Contact your financial advisor today for more information on dollar-cost-averaging.

Upvest™ – A Way To Do More For Less

Don’t just invest, Upvest – especially during turbulent times. The Upvest strategy is an important element in wealth creation. If you look closely at the world's wealthiest individuals, they share some common characteristics. In most cases, these individuals are business owners. How were they able to start and expand their businesses? In most cases, they borrowed money to achieve their goals.

“Upvesting” is actually “leveraging” and, when used over the long term, it has the potential to help you achieve higher effective rates of return and accelerate the wealth building process. In the case of a bear market, the Upvest strategy can be a way to take greater advantage of investment opportunities that might present themselves.

There are two types of rewards in an Upvest strategy – investment rewards and tax rewards. Let’s look at both:

Investment Rewards

1. An Upvest strategy is a forced investment plan – Many Canadians have a tough time setting money aside for the future. That's why, when it comes to investing, it makes sense for you to pay yourself first. Make sure you set aside money to invest, even before you pay for all the other costs you incur each month. An UpvestTM strategy makes this easy because it helps create a pool of invested capital that you are forced to pay for through monthly payments of principal and/or interest.
2. You can build wealth using someone else's money – Sometimes the money from a paycheque just isn’t enough to build a sufficient nest egg as soon as you'd like. Borrowing to invest often allows you to make use of someone else's money to build your own investment portfolio. In time you may be able to rely on your investments to provide a healthy cash flow. An Upvest strategy may provide you with the resources to get that financial ball rolling more quickly.
3. An Upvest strategy can boost your effective returns – The most enticing reward of a prudent Upvest strategy is the potential for higher effective after-tax returns. It’s important to keep in mind that an Upvest strategy won't increase your actual returns. If, for example, you invested in an equity mutual fund that generates a 10% annual return, the fund won't all of a sudden generate a higher rate of return just because you borrowed money to invest in that fund. Your effective return on investment, however, may be increased through an Upvest strategy.
4. You can reach your financial goals faster – Once you understand that your effective rate of return may be increased with an Upvest strategy, you'll also realize that this may lead to the possibility of you reaching your financial goals faster.

Tax Rewards

An Upvest strategy may create a tax deduction for interest costs, because when an Upvest strategy is administered properly the interest cost on your borrowed money is generally tax deductible. For every dollar in interest costs paid, you can expect to save an amount equal to those interest costs multiplied by their marginal tax rate.

While the Upvest strategy has wealth-building potential, it’s also important to know and understand the potential risks. These risks include: decrease in investment’s value; personal cash flow reduction; disallowed tax deductions; interest rate increase; margin call on your account; and consequences from emotions such as fear and greed.

However, these risks may be reduced when you practice the following rules: work with a trusted financial advisor; borrow only a reasonable amount of money; choose the most appropriate type of loan; invest in equity mutual funds; understand the risks and rewards; make sure you have sufficient and stable cash flow; Upvest for the long term only; and keep your interest costs tax deductible.

You can learn more about the Upvest strategy from your advisor, or by visiting the AIC website at www.aic.com.

Create wealth with “time in the markets”, not “timing the markets”

The wealth an investor can create in stock market investing is determined by:

• The amount invested;
• The return earned; and
• The length of time the investment compounds.

How important is length of time to overall returns?

The graph below shows the price paid for missing the stock market’s best days. Investors who missed the stock market’s 40 best days between January 1998 and December 2007 saw their $10,000 investment decline to less than $5,500. Investors who stayed in for the full period saw their investment’s market value increase to more than $20,000. A long-term mindset when investing can increase the odds of investing success.

Source: Bloomberg