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Improving Your Investing Behaviour

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Has volatility in the marketplace got you down? Here are some worthwhile considerations on how to improve one’s investing behaviour:

Remember your time horizon. Staying invested and sticking to a well-thought-out plan is the key to longer term investing success. This means avoiding the temptation to engage in market timing. Nobody has ever been able to consistently predict what the markets will do next. Volatility is inevitable in the short term, but, as history has shown, its effects smooth out over time.

Pay less attention to the financial headlines. It is easy to become preoccupied with the daily financial headlines. In the worst of times, the media can sensationalize the doom and gloom, which may feed speculation and cause poor decision making. Conversely, the media may create unfounded hype. Informed decision making should not be based on isolated headlines of the day, but rather solid data, thoughtful evaluation and consideration of your own personal goals and objectives.

Avoid succumbing to emotions. As the old saying goes, the market is driven by two emotions: greed and fear. During good times, greed often entices investors to enter the market but often at premium prices. During difficult times, many investors will sit on the sidelines out of fear and overlook bargains that may exist, or, worse, liquidate their portfolios
at the market bottom. Keeping focus on your investment plan’s objectives can help during times of emotion. Working towards measurable goals within your plan will help to maintain perspective.

Revisit your plan. Change is inevitable! Financial markets are constantly changing and the prospects of specific companies, industries, or even entire asset classes that may be attractive today may not be as attractive tomorrow. When reviewing your portfolio, diversification should be a broad goal to ensure a healthy portfolio balance and minimize the impact of adverse change.

Over time, your personal needs may also change. As such, your holdings should be adjusted periodically. Don’t forget that your objective is to produce solid returns over time, and not to own particular securities forever.

Keep tax considerations in mind. They can make a difference to the bottom line, especially during times in which high returns may be difficult to achieve. Don’t forget to use tax-deferral and tax-free vehicles (such as Registered Retirement Savings Plans and Tax-Free Savings Accounts), to their fullest extent. Consider the tax status of different forms of investments when you review your portfolio allocation. Dividends enjoy the benefit of the dividend tax credit (for qualifying taxable Canadian corporations). The tax advantage can be significant. As an example, an investor in a tax bracket with 46.41 percent tax on interest income and 29.54 percent on dividend income would need approximately $1.31 of interest income to equal $1.00 of dividend income before taxes are paid. Capital gains are taxed at even lower rates.

At the same time, don’t let tax considerations control your decision making! We’ve seen situations in which investors who are reluctant to sell a holding because taxes will be triggered, overlook important factors such as the changing fundamentals of the security or the need to maintain portfolio balance.

Emotions and Our Investing Decisions

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It’s no surprise that human emotions can often have an impact on investing. Understanding the psychology behind why we make certain decisions can provide some perspective as we pursue the task of wealth building.

It’s no surprise that human emotions can often have an impact on investing. Understanding the psychology behind why we make certain decisions can provide some perspective as we pursue the task of wealth building.

Richard Thaler, a University of Chicago professor, is one of the pioneers of behavioural economics, a field that studies how emotional factors can affect economic decision making. Neuroeconomics explains that we are not biologically wired to make the best financial decisions because the part of our brain that tells us to act rationally can easily be overtaken by powerful emotional impulses. Thaler points out that people tend to be in one of two emotional states: hot or cold. Irrational decisions tend to be made when we are in our hot state. This may explain why we make certain choices: when we aren’t hungry (cold state) we might choose a healthy salad. But once dinner rolls around and we are hungry (hot state), we may select a big bowl of pasta instead. We often overestimate the self-control that is necessary in a hot state.

Likewise, our brains can react the same way when we are investing. Some examples? We may be fixated on a particular sell-price target and refuse to sell a losing position — called anchoring — even though new information changes the target. Or, we may be led into herd behaviour, mimicking the actions of a larger group, even when we would not necessarily make the same decision on our own. This may be one reason why investors sometimes fall into the trap of buying high and selling low. Behavioural finance can also help to explain other peculiarities of human behaviour, such as why we may overlook the importance of saving or why we don’t always put away enough for retirement, even though we know how important it is.

How can we use this knowledge to improve our own investing ways? Being aware of our emotions can help to better regulate them. Those who study behavioural economics claim that many of the world’s best investors have mastered the art of treating their own feelings as reverse indicators. Excitement becomes a cue that it’s time to consider selling, while fear tells them it might be time to buy. Equally important, decisions should be made before entering into potentially emotional situations. This may include sticking to a financial plan during difficult times, refusing to succumb to emotions when the media gets heated or avoiding the urge to procrastinate when updating power of attorney or estate plan documents.

How Investment Advisors Help

Human emotion can be one of the investor’s worst enemies. According to one study that attempted to quantify the impact of human emotion, between 45 and 55 percent of an average investor’s underperformance can be attributed to psychological factors.*

As advisors, one of our more important roles is to help remove the emotion from investing. We encourage a disciplined approach that emphasizes quality, patience and participation to serve investors over the longer term. We implement risk mitigation techniques to help support portfolios throughout any market period, which may include rebalancing to a certain asset mix, limiting the size of any one holding and maintaining quality criteria for assets.

We are here to provide support and keep you on course, so that human emotion doesn’t impact your investing ways.

Source: *Dalbar, Quantitative Analysis of Investor Behaviour, 2013.

 

Estate Planning: A Snowbird Checklist

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Heading south this winter? Winter is the time of year when many Canadians plan their escapes from the cold and head to warm weather destinations. While many planning efforts are focused on setting up tee times, updating travel insurance and protecting houses before leaving, one important consideration should be making sure your estate plan is in good order.

 

If you are a snowbird, here is a short list of some estate planning considerations to address before you leave for your warmer destination:

  • Have a valid and updated will and powers of attorney. Those empowered by the documents should know where they are stored should something happen to you while you are away.
  • Keep an updated list of all of the institutions where you have assets or that provide professional services to you (i.e., banks, accountants, lawyers, insurance brokers, etc.) and a contact person at each company.
  • If you own property outside of Canada, you may need to seek legal advice to determine if you need a separate will and powers of attorney for that country. If so, ensure that your foreign will and powers of attorney are properly integrated with your Canadian documents.
  • Consult an accountant to plan around any potential income or estate tax liabilities relating to the ownership of foreign property.
  • Keep track of the number of days you spend away as you may be deemed a resident for tax purposes in another jurisdiction if you spend more than 182 days per calendar year outside of Canada.

To help give you further peace of mind before you depart, consider completing the following as part of your ‘to-do’ list:

  • Make a list of all your investments, bank accounts, credit and banking cards so you have a clear picture of your overall financial status before leaving.
  • Leave copies of important documents with a trusted individual back at home for safekeeping.
  • Provide instructions to your financial institution regarding term deposits and Guaranteed Investment Certificates (GICs) renewal.
  • Pre-arrange Registered Retirement Income Fund (RRIF) deposits for a steady stream of income while away.
  • Pre-arrange re-occurring bill payments through online banking or by automatic withdrawal to ensure timely payments.
  • Set up direct deposit for your government allowances such as Canada Pension Plan (CPP) and Quebec Pension Plan (QPP); GST credits; Old Age Security (OAS) to avoid missing out on income.

Contact us today at 204-259-2859

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ESTATE PLANNING: Understanding Trusts

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When developing an estate plan, the inclusion of a trust, or multiple trusts, may help you to achieve your personal objectives and enhance benefits to be received by future generations.

 

WHAT IS A TRUST?

A trust is a relationship where a person (the settlor) transfers property to another person or company (the trustee) who holds that property for the benefit of another person (the beneficiary). In general, it is possible to have more than one settlor, trustee, and/or beneficiary of a trust.

TYPES OF TRUSTS

There are two categories of trusts: i) inter vivos, a trust created during the settlor’s lifetime; and, ii) testamentary, a trust created as a consequence of an individual’s death by way of their will.

TAXATION OF TRUSTS

Since a trust is a relationship and is not generally recognized as a legal entity, trusts are regarded as individuals for income tax purposes.

In an inter vivos trust, all of the trust’s income is generally subject to tax at the highest marginal rate for individuals. With the exception of a Graduated Rate Estate (a designated testamentary trust subject to tax at the graduated rates in the same manner as an individual for the first 36 months of an estate), testamentary trusts are also subject to tax at the highest marginal rate for individuals.

While trusts are treated as individuals for tax purposes, they do not receive the benefit of being able to claim personal tax credits.

All, or a portion, of the income earned by a trust in a taxation year can be paid or made payable to all, or some, of the beneficiaries of the trust. This income will retain its character (e.g., eligible dividends, capital gains, etc. earned by the trust and distributed to beneficiaries will be considered to be eligible dividends, capital gains, etc. of the beneficiaries) and will be subject to tax in the recipient beneficiaries’ hands. Any income that is not distributed to the beneficiaries in a taxation year will be subject to tax within the trust.

POTENTIAL USES AND BENEFITS

A trust may be used as part of an estate plan to provide some of the following benefits:

Income Splitting —Tax savings may be achieved by distributing all, or a portion, of the income earned by the trust to beneficiaries who are subject to tax at a lower marginal rate than the trust, or who have unused loss carry forward balances or personal tax credits, since

the income will be taxed in the beneficiaries’ hands.

In the case of an inter vivos trust, careful planning is required to ensure that the income attribution rules do not apply in any potential income splitting strategy.

Asset Protection — If structured properly, trusts may help to protect assets from your/the beneficiaries’ creditors, the potential breakdown of your/the beneficiaries’ marriage, and from the beneficiaries themselves (in the event they are minors, disabled, or not currently at a stage in life where they have the capacity to own certain assets outright).

Further, for individuals residing in certain provinces, the trust may protect the assets held within it from estate administration (i.e., probate) fees.

If you would like to further explore the potential benefits
of setting up a trust, or need assistance with other aspects of the estate planning process, please give us a call or visit our website.

Contact us today at 204-259-2859

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Sandwich Boomers: Easing the Squeeze

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Today’s baby boomer generation faces a new challenge: the dual role of taking care of children and aging parents. Currently, many baby boomers provide some form of care to aging parents but also provides support to children. Increasingly, boomers are finding themselves “sandwiched”, as children take longer to become self-sufficient and elderly parents live longer. However, there may be ways to ease the challenges for those who face this dual-support role.

 

Caring for Parents 

The planning process is best started when parties are healthy and not in a position of crisis. Often, conversations are avoided until a crisis occurs, which forces the need
to make quick decisions under stressful conditions with insufficient information.

Discussions may be difficult and should be addressed
with sensitivity, care and the full cooperation of all parties, especially the parents. Be prepared for the possibility of non- cooperation — talking to elders about new circumstances, particularly those involving money or lifestyle, may be
met with suspicion or hostility. Each situation will differ: some may require several low-key approaches over time; others may be better supported by the services of outside professionals. Engaging all siblings may be helpful as they will likely be involved as time passes.

Having access to the financial information of aging parents may be an excellent start in order to determine what is feasible and where help may be required. If a comprehensive estate plan exists, it may be possible to offer assistance within its context. Such a plan will focus on achieving set retirement-planning objectives, maximizing asset value and minimizing taxes until the time that assets are passed on

to beneficiaries. An estate plan should include a will, have defined beneficiaries and executors (or liquidators/estate trustees, depending on province/territory of residence) and may also consider the use of a trust.

A power of attorney should be drawn up if one doesn’t already exist. There may be separate documents for health care and financial decisions. Depending upon the province or territory of residence, these documents may be known by different names. They should be reviewed periodically to ensure they remain relevant.

 

Considering Your Children’s Needs

In the event that you will need to care for your elderly parents, it is important to discuss the changing situation with your children. Children will likely have questions or concerns that may need to be addressed.

As you try and balance your family’s needs, you may consider having conversations with teenagers about taking a more active role in meeting the future costs of their education; or, for older children, expectations of timing for their departure from home.

Recognize that this may be a difficult and stressful time for children and do not forget the importance of your ongoing responsibility to them.

 

Looking After Yourself

The dual role of caring for elderly parents and supporting children
may be physically, emotionally, and financially challenging. However, in order to be a support to others, you must first be able to look after yourself.

Many informational resources and support organizations are available to help you make the best decisions for your family. Government assistance may also be available, including the Employment Insurance Compassionate Care Benefit, for individuals who have left work temporarily to provide care

to a gravely ill family member, and the Caregiver Tax Credit, for individuals living with a qualifying dependent.

Finally, it may be necessary to revisit your own financial plan when support needs change as your own financial well-being should always remain the priority. Don’t hesitate to contact us for assistance with any financial or investment matters.

 

Contact us today at 204-259-2859

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