Your future starts now
RSP and mutual funds tax season ends March 2
By Chris Woodall
Bankers and credit union folks call it "the magic of compound interest."
The magic spell applies to small amounts of money you regularly invest in a retirements savings plan (RSP), mutual fund or other tax sheltered product that over time can grow well beyond the amount invested.
There are several tricks to this kind of magic and some surprises.
One surprise is that you can maintain a mutual fund, etc., for as little as $25 a month.
Of course there is an initial investment of between $500 and $1,000 depending on the type of vehicle you want your money to drive. But if you can swing that, then you are on your way to a comfortable retirement destination.
In Whistler, the Royal Bank, Toronto-Dominion Bank and North Shore Credit Union have tax sheltered products that are similar in many ways.
But there are differences.
The most obvious is the credit union's Ethical Funds, a group of mutual funds that restricts its investments to companies that follow certain ethical guidelines.
A big incentive to get some kind of RSP or investment portfolio going right away is the income tax benefits you can get. But the deadline to start an investment portfolio or RSP is March 2 for this tax return season.
But let's start at the beginning.
If you are curious (yellow) about putting some money aside, all the financial institutions in Whistler offer free advice.
And what they'll advise you most of all is to get as much advice as possible.
All three recommend the novice investor start small and put money in mutual funds or other products where the risk is smallest.
The second recommendation is that if you invest, it should be for the long haul. Change which items you invest in, sure, but stay in.
What goes up will come down, but what goes up or down will eventually go up over the long run, especially if the investor stays with the less-risky items, advisors say.
Remember the 1987 "crash" in the stock market. One year later to the day the stock markets were 10 per cent higher than just before the crash.
Banks and the credit union do not charge front end fees, back end fees, or transaction fees that can be tacked onto your investment if you go with investment houses.
"We are not commissioned sales people, which makes the customer more relaxed that advice given isn't biased to lining the advisor's pockets," says Karen Peddie, personal financial services manager with Whistler's branch of the Royal Bank.
The flip side is that the reason investment houses charge a variety of fees is that the potential to make more money is greater with them than the safer and lower percentage rates paid with bank/credit union products.
Financial advisors say you should re-evaluate where your money is at least twice a year. Part of the mutual fund you started with may be better off in a term deposit or another fund as financial and stock markets ebb and flow.
And too, financial advisors are insistent that you spread the money around. There's always something going up while other markets level off or decline. Look at recent gold activity. Or Asia. Or the lumber industry. Or the Canadian dollar (and other currencies).
"If you re-evaluate your investment mix quarterly (every three months), over the long term you will increase your return by 2 per cent on top of everything else you've earned," says Todd Bassett, TD Bank manager at the Whistler branch.
You can spread your money too thin, too. "There are too many mutual funds to try to track them all," Bassett says of the 1,500 to pick from in Canada alone. "It's like going to the horse races and betting on all the horses."
Beginners shouldn't get too caught up on daily business reports. By the time you read it, the market has already responded.
"Your plan manager is supposed to be the one reading the papers to recommend what the markets are doing," Peddie says.
"People tend to beat themselves up over perceived failures, or not being in the hottest spot each time," says Peddie. "There's no way you're going to get the top investment each and every year. Even market experts are only 70 per cent successful."
Or as Bassett puts it: "Never try to time your investment to what the market is doing. It's the tail wagging the dog."
That's why you talk to financial advisors.
Depending on the bank or credit union, they have questionnaires, charts and a desire to talk over your particular situation to determine what your level of risk and ability to invest is.
"If you are new to making these kinds of investments, tell the receptionist that you'll need more time to talk to us," Peddie says. "Ask as many questions as you like."
Don't leave talking to a bank or credit union financial advisor to the last minute so you can be sure to have time to think everything through.
Assuming you want to go the mutual fund route, all financial institutions have a range of funds specializing in different groups of investments: money markets, North American companies only, Canadian companies only, Asian only, European only, certain industries only, or mixes of everything.
As far as your income tax return deductions are concerned, a mutual fund must not have more than 20 per cent foreign content to be RSP eligible.
"Pick one, but don't pick more than two mutual funds with foreign content," is Bassett's advice.
Then there are the credit union's Ethical Funds.
There are eight funds in the "family," covering the same sorts of groupings as the banks' mutual funds.
What makes them different is a screening process that prevents the fund from investing in companies that derive significant income from tobacco products, military arms production, nuclear energy, or in countries where there are human rights violations.
Corporations should promote good employee relations and should comply with environmental regulations.
Booze is not considered an unethical product, says Mike Johnson, a financial advisor at the Whistler branch of North Shore Credit Union.
"A benefit of these screens is that they also filter out companies that may be problems for investors," Johnson says, noting how the tobacco industry is currently taking a beating from American and Canadian governments.
Putting morals over a quick investment buck doesn't mean the Ethical Funds family are weak performers, Johnson says.
The North American Ethical Fund was the #4 performer last year and mutual fund guru Gordon Pape picked the Ethical Growth Fund as the "fund of the year" for 1998 for its performance related to its riskiness.
Three Ethical Funds were picked by investment soothsayer Ranga Chan as "heavy hitters."
"That these guys have come out and said these Ethical Funds are some of the best funds in the country is high praise," Johnson says.
But at the end of the day, advice is just advice, say all the advisors. The final decision is up to you.