- Comments (22)
- Text Size: Down Up
moneysense.ca, 31/12/08
2008: A Retrospective
History books will mark 2008 as a year that showed how quickly stock markets can go down. It is hard to believe but as recently as June of this year, the TSX Composite was higher than 15,000 and is trading around 8,830 now. Canadian stocks also have plenty of company — it is hard to find a single asset class apart from Government of Canada bonds that had a positive year.
European, Japanese and Emerging market stocks had a very bad year but US stock returns would turn out to be relatively better (if you can call a 20% or so fall “better”) due to the significant depreciation in the Canadian dollar.
If the rapidity of the stock market decline was stunning, the volatility was remarkable as well. The stock market fell or rose more than 5% all too frequently — especially during the months of September and October.
The bad news doesn’t end with the stock market, of course. With the major economies in recession, businesses started laying off workers and our pay checks were in danger as well. Add it all up and 2008 will end up as a horrible year from a financial perspective.
Amidst all this doom and gloom, there were some scraps of good news. Pretty much every asset class (again, except Government bonds) is now a lot cheaper now than at the start of the year. Softening home prices should be welcome news for first-time home buyers. And finally, the introduction of the Tax-Free Savings Account will turn out to have a significant impact on our personal finances.
Here’s hoping that 2009 turns out to be a better year. Happy New Year to you all!
moneysense.ca, 31/12/08
Good summary of a crazy year CC.
Happy New Year to you and your family!
Happy new year!
In fact the bargain prices of index funds right now is making me contemplate, for the first time, getting an RRSP catch-up loan to max out my contribution. I didn’t meet my RRSP limits over the past five years or so because I was saving for a house, so I now have a large (over $50K) contribution limit and could buy a lot of shares with that amount of money. My marginal tax rate is 48.2 percent and I was already planning to put $15K of my own money into my RRSP this year, so the refund would allow me to pay off about 2/3 of the loan on the spot. RRSP loans are typically at prime (around 3.5 percent), which doesn’t seem too onerous to me and I could pay off the remaining balance pretty quickly.
Normally I would never consider taking out a loan to pay for RRSP contributions, but in this particular case it might make sense. Any thoughts?
Happy New Year!
Happy New Year CC!
Being in my early thirties, I am quite happy about the correction (and the TFSA). Thanks for all the great posts this year and I hope you are having a great time with your family as we wind up the holidays. Cheers!
Brad, be careful making a large RRSP contribution like that. You could end up bumping yourself down into a lower tax bracket so the tax deduction you actually get may be less than you have calculated. Go to http://www.taxtips.ca/marginaltaxrates.htm to look at the tax brackets for your province to see if your income – your proposed RSP contribution would put you in a lower tax bracket. It seems like you are either in Quebec or Nova Scotia and in both provinces if your net income drops below around $126,000 you will drop to a lower tax bracket (with a marginal rate around 42% instead of 48%).
Sorry, the marginal rate drops to around 45% from 48%, not 42% like I had mentioned above.
Thanks oxCC, I forgot to mention in my original comment that I’d already looked into that and the contribution would not bump me down into a lower bracket. I also made some charitable contributions in 2008 so it’s going to be fairly close, but if my calculations are correct I should still remain in the highest marginal bracket (I’m in Québec, by the way).
Brad. For me personally, I’ve always had an aversion to carrying non-tax deductible debt. Based upon the information that you gave in your post, my suggestion is as follows:
With your existing $15K cash RSP contribution, you would be expecting about $6K in your tax return.
If you borrowed and invested $10K to increase your RSP contribution, you would be getting an additional tax return amount of about $4K, for a grand total of around $10K.
As a result, your RSP loan would be $10K and your tax return would be about $10K. So, when you receive your income tax return, it becomes a complete wash with regards to your RSP loan. As a result, the only money you would fork over to your bank would be the interest from the time of your RSP contribution to the time you get your tax return. Then voila! You’re still free of non-tax deductible debt!
Thanks Phil. That makes sense to me, as I too am very debt-averse, but the bargain opportunity (in terms of buying shares of an index fund at historically low prices) is something to consider here.
I would have to borrow about $35K to max out my contribution room. With my $15K (a $50K contribution altogether) I would get a refund of about $20K, probably a bit more as I always seem to overpay my provincial instalments. That would leave me with at most $15K to pay off on my loan. That’s still a lot of money and I know I’d grumble at every penny I pay in interest, but I guess the bottom-line question is whether the expense is worth the opportunity to buy into the market when it’s low. Nobody can predict the future, of course, but my gut tells me that the benefit from buying a lot of shares now, when I’m about 15-20 years from retirement, will greatly outweigh the short-term cost of carrying $15K of debt at 3.5 percent.
But I’m not convinced, so would appreciate any other thoughts on this as I ponder what to do. Thanks everyone!
Although I do it in my self-directed employer sponsored pension fund, I’m not a big advocate of indexing. As far as what to buy if you’re putting the cash into a self-directed account, I would advocate some diversification.
Pick some portion to put into a GIC as a GIC would guarantee your return on invested capital (as compared to a bond mutual fund) and be CDIC insured. The general rule of thumb is to put your age as a percentage of fixed income, but of late, I’ve been putting slightly more of my money into fixed income than my age as a %. As far as your equity portion, I would choose a handful of relatively high dividend paying stocks with a strong credit rating and/or be in a business that delivers consumer staples or other products or services relatively unaffected by a recession… The key is dividend paying, because that dividend will likely form a good portion if not the majority of your return on that investment over the next year or two or three.
As much criticism as they’ve endured, the Big 5 banks & big insurance companies, although battered and bruised, are likely to remain solvent through this economic crisis. Real estate is cheap right now, but probably for good reason – if you choose to buy a REIT, choose one which owns properties anchored by government offices, supermarkets and drugstores. Even if we’re in a depression, government will still need to rent office space, people will still eat and people will still get sick. As for other sectors of the economy, usually the bigger the market cap the better in a recession – but you still need to choose carefully! Pay close attention to the management team’s forward looking statements. If they don’t have some kind of contingency plan if things go to heck in a hand basket (like the Big 3), then you should steer clear.
Finally, I’m NOT an investment advisor. You usually get what you pay for and with that in mind, my advice is FREE. So, there ya go!
brad: I think stocks are a great bargain here but borrowing to buy is akin to buying stocks that you would have purchased over the next year, today. It may or may not be a great move depending on the market level in the future relative to now.
Instead, the most important question, IMO, is if any loan is a small portion of your portfolio (and net worth) and whether you can comfortably meet re-payment obligations.
Instead of borrowing for RRSP, cut your daily expenses and save up the money. Using that money will be free, no interest payments.
Brad: I agree with Phil S about using GIC.
The situation as I understand is this: 50k into RRSP and you end up with 15k loan of 3.5% interest.
I would divide up your investment in RRSP like this:
35k into equities
15k into GIC/bonds
As a result, you won’t have to be worried about the value of the loan’s investment falling below principal.
Since you have such a high income (highest tax bracket), there is no worries about a 15k loan. Try negotiating with the bank for a better interest rate than 3.5%. Bank of Canada will lower rates soon and best of luck getting a great loan.
Hi Brad,
I think you should max your RRSP contribution and put all the money in stocks. Like some other posters, I am not a big fan of indexing, but if you are not going to delve into the minutia of equity investing, indexing is statistically your best option in getting the best possible positive return from the stock market with the least amount of work. In fact, with indexing, you will probably do much better than most investors who do not index. So, indexing is a sound choice.
Also, I don’t think you should diversify your RRSP. I think you should be 100% in equities. You own real estate and bonds will be a drag on your long term returns. You have a long time horizon and I think anyone with a high income and a long way to retirement needs stocks to charge up portfolio returns.
Also, if a 50K RRSP deduction won’t move you into a lower tax bracket, how difficult will it be for you to repay a 15K loan? I assume that your income must be considerable for this to be the case. As such, taking on debt over the short term is not very risky. Also, EconStudent makes an excellent point regarding negotiating for a better loan rate.
Regards,
TEMPLE
Happy New Year!
[...] The Canadian Capitalist has a succinct summary of the year that was 2008. [...]
Thanks to everyone for the additional comments.
@Phil and Econ Student: I’m not looking for short-term returns on investment; my RRSP is by definition for retirement so really all I care about is what my equity shares are worth when I’m closer to retirement age and start shifting more of my assets into safer investments. So I am totally comfortable with the idea that I might invest $50K today and it could be worth $20K at the end of 2009. I do have some diversity in my portfolio, but most of that is in my retirement funds in the US (where I lived most of my life, I’m a dual citizen). So far my Canadian RRSPs are 100% equities but I’m planning to diversify a bit starting in 2009. I’ve only been living in Canada for six years.
I like the idea of negotiating for a lower rate, I will try that.
And yes, it wouldn’t take me very long to pay off a $15K loan. But there’s no way I’m going to be able to save $35K between now and the end of February! That’s far beyond my means. If I want to max out my RRSP room for 2008, the only way to do it is to take out a loan.
I’m still not sure I’m going to do it, but you all have given me some good things to think about, and I’ll ponder it some more before making a decision. Thanks again.
Brad, you could consider stretching out your contribution over all of 2009. While you won’t get the big tax refund this year you could also avoid the interest costs. I personally feel that the markets aren’t going to have a stellar 2009 so I don’t think you will lose much by averaging in over the year. Then you will also get a nice refund in early 2010 for your 2009 contributions.
Thanks, oxcc, in fact that’s the direction I’m learning toward myself. I won’t be able to max out my RRSP contribution room, but I can make a significant dent in it and can take advantage of dollar cost averaging. I’d rather do it at my own speed than go into debt.
Going up is slow but going down is faster than a bullet when you don’t manage things well. You will start slow and grow slow but you can lose everything in 1 day.
Lessons learned? Mine was that a portfolio of long only public bonds and equities is a pretty risky strategy.
[...] a difference a year makes! If the biggest story of 2008 was how quickly markets had tumbled, this year’s biggest story is likely to be how quickly [...]