Locate assets, remove clutter, add value and be moneywise

Locate assets, remove clutter,  add value and be moneywise

By Adrian Mastracci, Portfolio Manager, KCM Wealth Management Inc.

There are four areas of wealth management that investors tend to overlook more often than others. Mostly through no fault of their own. Let’s initiate a wide view of the task at hand and methodically deal with rectifying the parts overlooked. It’s not a very difficult job.

1.) Plan your all important ‘asset location’
Investors need to understand which accounts are better suited to hold their investments. Learning the implications of owning investments say in cash accounts, RRSP, RRIF and TFSA pays off. It typically requires you to combine “asset location” strategies with your asset mix. You’re familiar with the real estate catchy phrase “location, location, location”. A similar approach applies to the collection of investments owned. Don’t simply sprinkle the investments you buy into any random account. Instead, we recommend a methodical organization for those investments.
It is part of income tax planning and is called “asset location”. That is, which investment account is better suited to hold specific assets that you own. Relate your asset location decisions to the types of investment incomes you expect to generate. Your investment selections can produce interest, dividend, capital gain and capital loss income.
One key objective of the location combination you choose is to pay the least income tax. Ideally, you will prefer planning three different pools of investments like this:

• Registered: Registered accounts typically include the RRSP, RRIF, LIF, LIRA, DPSP and other locked-in plan varieties. All funds withdrawn from these accounts are treated as fully taxable like interest and salary. Where possible, interest bearing investments are more suited for such accounts. There is no preferential tax treatment of Canadian dividends, gains or losses and the dividend tax credit cannot be used.
• TFSA: All income earned in this account is tax-fee upon withdrawal. Hence, a mix of investment income types is acceptable for the TFSA. Similarly, dividend tax credits are lost and capital losses can’t offset gains outside this account. It also makes sense to hold investments with high capital gains potential in the TFSA. Unlike RRSP deposits that stop at age 71, TFSA deposits can be made for lifetime.
• Non-Registered: These are cash or margin accounts typically owned personally, in a company or in a family trust. Income from Canadian dividends, capital gains or losses realized in such accounts receives preferential tax treatment over interest income. Your “equity” investments such as stocks, mutual funds and ETFs are better held in these accounts for maximum income tax efficiency. However, the account owner reports the taxable income every year as deferral is not available.

Locating specific investments in all three capital pools provides investors maximum flexibility in retirement. However, not everyone maybe able to allocate among all three choices. Such as the investor who has little or no RRSP contribution room resulting from pension plan contributions.

Retirement decisions to draw funds from all three pools can change every year, subject to RRIF and LIF minimums. Having access to the three pools also provides more flexibility as to when to start receiving CPP and OAS benefits.

Asset location is an important component that fits like a glove with your asset mix. It’s best to weave both strategies into your game plan at the same time.
Ensure that your investment professional considers all the location options for your best interests. Your chosen combination of location and asset mix should better deliver on your goals and aspirations.

2.) Eliminate cluttered investing
Now that we’re clear on the investment locations, the next natural query is whether the investment closet is cluttered with lots of stuff. Likely purchased over the years from multiple advisers. Overflowing with stuff that may no longer serve its intended purposes.

Not purged for longer than anyone cares to remember.

We keep tabs on portfolios seeking second opinions. The majority hold 15 to 35 GLC: Plan four wealth management areas investments, primarily mutual funds. Keeping track of that many selections is not easy for any investor.

Here is our summary of the top signs of “cluttered investing”:

• Lack of a written investment plan and no established asset mix targets.
• No retirement projections and owning too many investments.
• Not understanding portfolio risks incurred and allocations to equities too high for comfort.
• Not receiving objective advice and lack of suitable portfolio diversification.
• Duplication of securities inside mutual funds owned and unclear on investment costs and exit charges.

The clutter approach has no favourites. It finds active and passive portfolios, novice and seasoned investors alike. Be sure to look carefully into your entire investment closet.
Just a few signs of clutter can be problematic for the long-term. If you have stockpiled investing clutter, face it head on. Take appropriate steps now to sort your things out.

3.) Adopt sensible investment strategies that add value
Plato, Greek author and philosopher once said: “The beginning is the most important part of the work.”

Learn the basics about investment strategies that add value to the nest egg. Then adopt the sensible ones that help attain and maintain your retirement goals. Investment strategies are the rules that guide and shape every portfolio. Search the internet for “investment strategies” and you will be reading forever.

We offer two observations:

• Investors are most preoccupied with investment selections.
• By contrast, portfolio managers focus first on investment strategies.

Investor mindsets can be aligned with those of portfolio managers. We’ve summarized our top strategies into a few sensible nuggets:

• Invest money over time guided by the long-term investment plan.
• Short-term investing is an exercise in speculation.
• Accept being powerless at influencing market outcomes.
• The benchmark is the return required to achieve or sustain retirement.
• Structure the investment plan within the family’s risk tolerances.
• Your investing philosophy embraces a comfortable, personalized asset mix.
• Pay close attention to both asset allocation and asset location.
• The medicine of choice is to create broadly diversified portfolios.
• Expect to occasionally rebalance investment positions.
• The preference is investment quality rather than chasing yield.

Adopt our short roster of straightforward, sensible strategies. They deliver consistent value over the long run. Ensure your investment strategies represent a sound approach to your before and after retirement goals.
Then, and only then, deal with your investment selections. Don’t accept anything less.

4.) Apply moneywise strategies any age
Investors fare much better when there is structure in their financial lives. Let’s assume life expectancy to age 90. That’s roughly 30 years to learn some basics, 30 years to save and 30 years to enjoy spending the invested nest egg.

Time is of the essence, so arrange your financial affairs to get there. Here is our summary of moneywise strategies to implement at any age:

• Identify your sustainable saving capacity. Find and maintain your sustainable or increasing saving capacity ballpark. An approach is saving a steady monthly base plus part or all of the annual bonus.
• Pay yourself first. Set savings aside before you have a chance or temptation to spend them. Aim for 10% of earnings in the early years, more after age 40. Direct bank transfers work well.
• Increase debt paydown. One of your best, risk-free investments is to accelerate debt repayment. Especially non-deductible loans.
• Add savings to investment portfolios. Long term success requires you to regularly contribute savings to the portfolio. Investing returns alone may have trouble achieving retirement.
• Become a wiser investor. Revisit your investing strategies periodically. Be very mindful of tolerances for risk and returns required to attain or maintain your goals.

These moneywise strategies can be initiated, revisited and tweaked at any age. They contribute heavily to your success, both individually and as a group. Add a little structure to the finances. Start as soon as you can. More focus may be required for retirements within 10 to 15 years.

The combinations of saving and investing strategies dictate the kind of retirement that develops. Paying close attention to these four areas of wealth management gets to the family goals quicker and easier.