With tax season underway, tax returns coming in, and hopefully new years resolutions still in place, it is a good time to bring up my investing thoughts for 2015.
This year, many Canadians in low tax brackets will purchase 5 year RRSP GICs at around 2.4%, with borrowed money at say 3.5% that they can’t deduct the cost of borrowing for. They do this to get a refund to…you guessed it, buy a new smartphone or another pair of shoes! Banks love these kind of people! This may be a slight exaggeration, but if it sounds familiar, maybe it’s time to re-think your savings strategy.
Others in higher tax brackets and have cash available, will also invest into low-return investments, when they should be looking at diversifying for greater growth potential.
RRSPs vs. TFSAs: People in low tax brackets may do better in TFSAs because there is no significant tax saving on their investment growth by deferring it in RRSPs. Plus, if they ended up in a higher tax bracket during retirement, they could lose more to tax on the withdrawal than they gained from the tax saving when they invested it.
Look to invest beyond Canada: If the Canada Pension plan changed their investments towards greater US and global exposure, the rest of Canada should consider the same. A recent poll found that baby boomers are the least likely to invest either in the US or globally. This is concerning, as it exposes them to the volatile swings in our domestic market, especially with resource heavy funds. Plus, considering that the Canadian market only accounts for about 3% of the total world market, global diversification is one way to potentially improve portfolio returns over the long-term.
Compare other market returns: Looking at returns over the past five years, the S&P/TSX Composite Index has given investors an annualized return of just over 7.5% as of the 2014 year end. Over the same time, the US S&P 500 Index has returned 17.78% adjusted to Canadian dollars. Check out Boomer & Echo’s guest blog on “Does International Diversification Still Work?” I think we are likely to see ongoing volatility in global equity markets for some time until world oil supply and demand imbalances resolve themselves. For us here in Canada with our heavily resource-based stock market, it means ongoing jitters for investors heavily weighted in that sector.
In addition to considering different geographic regions, I think Canadian investors should also look at a mix of balanced asset classes in a variety of economic sectors to ensure they have a well-diversified portfolio. Check out Boomer & Echo’s
Don’t base portfolios on historical returns: Considering that no asset class can continue to provide high (or low) relative rates of return forever, it’s important to understand that some level of volatility can be suited to your comfort level. Unfortunately for the many who stayed on the sidelines in bonds or cash since the 2008 crash, they missed a solid bull market run and should consider getting back in now. Remember Warren Buffet’s advice, “Buy when everyone else is selling and sell when everyone else is buying”.
Of Canadians polled planning to purchase stocks or mutual funds, almost 70% intend to invest in Canada despite our recent stock market volatility. This percentage is even higher among baby boomers. I would encourage all investors to sit down with a financial professional and discuss the opportunities of investing outside of Canada.
And remember, the 2014 RRSP contribution deadline is March 2nd.
Image licensed through Shutterstock