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The quest for the perfect investment portfolio

The RRSP deadline is here so it’s time to look at those investment portfolio statements and see how things are going.  I used to look at this information more regularly when it wasn’t so downright depressing.  Now I cringe when I see the statement envelope in the mailbox.  These statements have come to be reminders of bad choices – like some of the clothes that sit at the back of the closet.  If only we could drop off our bad investments at Goodwill and pretend we never owned them!
What should a working Canadian do? Saving for retirement is a necessity.  Public pensions are all well and good, but what if you want to be able to afford more than just the necessities?  RRSP’s are the logical choice in most cases – immediate tax deduction when you put the money in.  No tax on the (theoretical) growth until you take the money out, presumably when your income is lower than it is now, so you end up paying less tax overall.  Now there are certain cases when this tax theory doesn’t work.  If your income (and thus your tax rate) is not that high when you contribute, you could actually end up paying more tax when you take the money out during retirement, which obviously is counter-productive.  Having a higher personal tax rate in retirement could happen due to spousal RRSPwithdrawals, or perhaps selling a business.  If your spouse has a higher income than you do and you end up splitting that income in retirement using pension splitting , your tax rate could go up even though the overall tax you pay as a couple is down.  Certain government benefits for seniors, like Old Age Securityand the Guaranteed Income Supplement are also clawed back based on income thresholds, resulting in a higher effective tax rate. So, if you have a lower income, a Tax-Free Savings Account (TFSA) may be a better choice than an RRSP, depending on your own individual circumstances.  More number crunching needed!
Regardless of whether you choose a TFSA, an RRSP or just a regular investment account, what investments should go in there?  I’m not sure.  I wish that I had extensive training in stocks, mutual funds, investment allocation, etc.   But then again, would it really help?   Maybe a crystal ball would be better?

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In his book, Enough Bull, David Trahair makes a good case for avoiding the markets, and sticking with guaranteed investments – at least for a good chunk of investment money.  His logic is that it’s better to keep your principal and make modest returns than to lose what you put in.  I think we can all agree on that – nobody wants to throw their money away.  The problem with GIC’s (which he also acknowledges in the book) is that the returns don’t usually keep pace with inflation.  So, money saved now is actually worth less when the GIC term is up.  How is that motivation for putting money away?  Surely there is a better alternative?  Maybe one (or more) of you have figured it out and I’m just out of the loop?  If that’s the case, please feel free to enlighten me!
August 20, 2012

2 responses on "The quest for the perfect investment portfolio"

  1. The best investment is real estate. It keeps pace with inflation and you pay no capital gains when sold, if it is your primary residence. A secondary residence is my next investment choice, however, I am reluctant to be a landlord. It could be a very good choice for those who are able to do the repairs and are able to deal with people. Do you see the value in a second residence?

    • Thanks for the comment – real estate is an option worth considering. Tax rules do not allow a direct investment in real property within an RRSP. However, having a second residence outside your RRSP can be profitable in the long run in the right circumstances. There are also some positive aspects about the taxation of this income. While rental income after related expenses is taxable, it will count as earned income and generate RRSP room. This is not the case for other investment income.

      Real estate has some barriers that are difficult to overcome for the average person. First, you can’t just invest a small amount. The price of most properties is well into the six-figure range, which usually means that a mortgage is necessary. Second, real estate can be a drain on cash flow even when its value is going up. Property taxes, insurance, upkeep, and mortgage payments need to be made. If you rent the property, the rental income could cover these expenses – if the rental market in the area will bear the price you need to charge to cover the costs. If the property sits vacant for a month or two (or longer), the costs still need to be covered. Third, the hesitation to be a landlord that you mentioned is a common hurdle. A management company could be hired to look after the details, but that cuts into profitability. Fourth, the remote possibility of having tenants leave the place in a less than desirable state is one that can spark some fear. Fifth, real estate cannot be liquidated quickly if you need the money. Sixth, the acquisition costs (land transfer taxes, legal fees, etc), and the costs of selling (real estate commission, legal fees) if and when the time comes mean that you need to hold it for quite some time in order to make it worth it.

      If anyone reading this has a success story with real estate in spite of these hurdles, I’d love to hear it!

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