Starting The Year Off Right

Bratislava_New_Year_Fireworks

The first couple of weeks of 2016 started off with a whimper for the stock markets across the globe. That’s to be expected after almost 7 straight years of gains. I’ve mentioned before that investing is a long term commitment and that’s why we shouldn’t be concerned about short term losses.

Throughout the history of the stock market it’s hard to find any 25 year investment period where stocks were actually down. So if you are saving and investing for retirement, just forget about these ups and down and just enjoy life right now.

Despite the volatility in the markets, the beginning of the year is as good as any time to start reviewing the performance of your investment portfolio and make the proper adjustments. This means you should look at contributing to your TFSA for 2016, rebalancing your portfolio and perhaps revisiting some of you goals with your financial advisor.

Contributing To TFSA

The fact that so many Canadians don’t contribute to their TFSA is astounding. The percentage of people that actually put money into their TFSA is actually lower than that of the RRSP and it’s definitely perplexing. Don’t people know that gains in the TFSA are tax free whereas the RRSP is tax deferral? Probably not.

Despite what the media and the Liberal government would want you to believe, the TFSA is not for the rich. In fact, the TFSA is what everyone should be contributing to first unless you are rich or making a large annual salary.

To those that have been living under a rock or too obsessed with the latest TMZ news, the TFSA limit has been reduced back to $5500 for 2016. If you haven’t used the $10,000 limit from 2015, don’t worry you still get to keep that accumulated amount. The rollback to $5500 was not made retroactive to 2015, so you don’t have to feel slighted by the government for not having enough money to contribute in previous years.

The total contribution room for the TFSA has now accumulated to $46,500 since 2009. This is a very significant amount of money that someone can now put into the TFSA to invest. Let’s just say if you were 18 when the TFSA was introduced and after 7 years you are now 25 and have a wack of money to put into the TFSA for the next 40 years for retirement. At a very modest 5% annual compound growth rate, the account would accumulate over $325,000 by the time you turn 65. That’s a big chunk of money and it’s all tax free. That amount also assumes that you don’t invest any more money for the next 40 years. Amazing what compound interest can do right?

Just remember that if you are making a contribution, don’t go over your contribution allotment for the year. Otherwise you pay a hefty interest penalty. If you don’t know how much room you have, then go and sign up for an account on the CRA website. Having an account on the CRA site is actually quite amazing. You can adjust your direct deposit details, change addresses, look up your past tax return history and many other things. It’s certainly something to consider getting. It’s not Facebook, but it’s a very important account to have.

Rebalancing Your Portfolio

I’ve written a guide before on how to rebalance your portfolio and after a year in 2015 where there were varying returns on different investments, it’s a smart thing to ensure that your investment portfolio still reflects your original goals.

I wanted to show the differences in returns between 2014 and 2015 just to prove how inconsistent an investment portfolio could be:

2014-2015-returns

All the returns above were taken from Stingy Investor and they represent nominal returns in Canadian dollars before taxes. It’s not a lie, the US S&P 500 had another outstanding year for Canadians. Why is that? It’s because our Canadian dollar tanked and despite the fact that the S&P was down for the year, for Canadians it was a huge gain. On the opposite side of things the TSX was hard hit by a huge drop in the price of oil. The other surprising figure is the EAFE, which is the international stock index for companies outside of Canada and the US. These are your international stocks. Despite having a lacklustre 2014, 2015 was an amazing year with 18.8% growth. This is also why you need diversification.

Diversify not only in the types of investments you make, but also the region and location. That’s how you really get the benefits of a global economy. Remember that Canada is but a small fraction of the world’s economic growth. Don’t get left behind on the wrong train.

Review Your Investment Goals

So how did it feel in the first two weeks of January? Is your stomach churning from the big drops in the stock market? Do you feel the urge to sell your stocks because they are down almost 10%? Do you have trouble sleeping at night? Do you feel hesitant to continue putting money into a falling market?

If you answered yes to any of these questions then perhaps it’s worthwhile to review your own personal tolerance for risk. I love talking to people and saying “oh, I really want to get into the stock market for those hefty gains.” People jump head first without recognizing their own risk tolerance and that’s where the trouble arises when stocks fall.

Fear trumps greed. When things lose money we get extremely emotional and do irrational things like sell our investments at the bottom of the market. If that sounds like you perhaps a more conservative approach is better. Not everyone should be invested in 60 or 80 percent in equities. Leave that for the risk takers. Perhaps something along the lines of 40-60 between equities and fixed income is for you. There is no right or wrong answer.

You may end up with lower returns in the end, but you are investing for your future and for your own sanity. Now is as good as anytime to review your own personal investment allocations and judge whether the investment portfolio fits your personality. Remember to stick with what you decide. Don’t waver and follow markets just because they do poorly or well. Everyone should have a thesis that they should stick to.

Until next time…

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