Your Interview

What is your opinion about investment loans offered by mutual fund companies?

Jim Yih: I am not a huge fan of leverage (borrowing to invest). I believe the concept has been popularized by the investment industry because it is a way to make a sale when people don’t have money to invest. (That’s not always the case but the conflict of interest is clearly there.)

Mathematically, leverage works if the after tax return on investment exceeds the after tax cost of the interest on the loan. While projections may appear to be in your favour, make sure you look at a projection where the investment return does not exceed the cost.

There are so many people that have not made money on leverage which means the risks are real. Many times psychology and emotions create hurdles for investors who borrow to invest. Leverage can work but just be careful and make sure you are aware of the risks.

Hey Jim,

Index funds have been shown to outperform mutual funds. Speaking statistically, how do you feel about investing in mutual fund vs index funds?

Jim Yih: I’ve done some research on the impact of fees in a portfolio and there is no question that fees can have a significant affect on the performance of a portfolio. All things being equal, an index should outperform a mutual fund because of the 2.5 per cent Management Expense Ratio (MER).

The MER is paid to the mutual fund company and the financial advisor selling the fund. In some cases, there can be value in paying someone to manage your stock portfolio but in many cases, because of the fee, mutual funds will under-perform the index long term. It is important to note that in the short term, performance is more random and fees do not have a significant impact on short term performance.

I have been contributing to RRSP for last 15 years.
I still have about 10 to 15 more years before I retire.
Should I maximize contribution as I have been?
I lost 16% last year.

Thanks,

Jim Yih: Hi Rebecca,
RRSPs have two key benefits. You get a tax deduction when you put money into the RRSP and secondly, your RRSPs are tax deferred until you take the money out. When you look at these two benefits, most people invest in RRSPs for the short term tax savings from the tax deduction. However, when you have a lot of time (10 to 15 years), the long term tax deferral is a bigger benefit. The bottom line is if you put the money into the RRSP when you are in a higher tax bracket (when you are working) and take the money out when you are in a lower tax bracket (retirement), I think RRSPs still make a lot of sense.

If I had $5000.00 extra money in 2009 should I put it into RRSP's or the tax free savings account. (I don't forsee withdrawing the money for several years).

Jim Yih: Hi Warren,
You bring up a great question that is very personal in nature. To properly answer that question, you need more information. Everyone’s circumstances are different. For example, Let’s look at Larry who is 45 years old making a lot of money and does not plan to use the money for 15 years. He has no pension plan through work so when he stops working he will be able to draw RRSPs out at a lower tax bracket. I think Larry should buy RRSPs because he gets a good tax deduction now and benefits from long term tax deferral.

On the other hand, Stacy is also 45 but she works for the government and will have a very strong pension when she retires. Although she does not need the $5000, she wants to be able to access it if necessary. She should use the Tax Free Savings Account.

The worst thing you can do with RRSPs is take it out when you are in a higher tax bracket. Hopefully that helps.

what would i do to my money
that i invested to mutual funds ? should i just transfer it to GIC before i lost all of it or leave it the way it is and hope the current financial crisis will turn around for the better?
pls. reply

Jim Yih: Great question! The best way to make money on non-guaranteed investments is to buy low, sell high. Although this make a lot of logical sense, it is very difficult to practice because psychology and emotion gets in the way. I would argue that prices today are more on the low side than the high side knowing that history shows everything goes in cycles. For people, selling now to buy GICs is not a logical strategy but one that helps people sleep at night. If you have time, hang in there.

On the other hand, I would argue the buy and hold which means hang in there works most of the time but research precedes everything. If you buy crap and hold crap, you will always have crap. In other words, make sure your investments are good quality and will come back over time. If you don’t know, make an appointment and ask your advisor whether your mutual funds are still good funds. Good Luck!

I've heard alot about the tax free savings accounts. Is this really a good place for savings if they are bank accounts with very low interest?

Jim Yih: There is no question, Tax Free Savings Accounts (TFSA) are the new buzz for 2009. I think TFSAs are great and they have a very wide appeal for many Canadians. Young or old, working or retired, married or single, TFSAs can ge great for many different people. Low interest rates are a function of the economy. Although the rates are low, the money is safe. If you want safe, you have to accept low rates.

With TFSAs, you can invest in many things including things that give you higher potential returns like mutual funds or stocks but that brings more risk. Like anything else, make sure you shop around for your options.

Are the people managing my mutual fund worth the fees I pay them? How can I tell? Are financial planners truly experts or are there mere cheerleaders or salespeople? Why should I trust them? Why should we listen to Jim Yih?

Jim Yih: Allan,
I guess the first thing is Jim Yih is a little more objective and unbiased because he does not sell mutual funds. The reality is there are good financial planners and bad financial planners but there will always be a potential conflict of interest because they get paid to sell funds. As discussed earlier, if you think your advisor is worth the fees you pay them, you will keep them. If not, you should fire them and/or look for someone else. Good Luck!

Hi,
I have just recently graduated from a technical institute and am working full time. I have some extra money every pay check and am looking to invest it.I save a couple hundred dollars in rrsps every month, but would like to know what some of my othere investing options are. any advice would be appreciated.
thanks.
shawn

Jim Yih: Congratulations for good thinking. Automatic forced savings is a good habit to start and if you keep with it, you will be on track to being ahead of the curve financially. In terms of what to invest in, RRSPs are still great for long term disciplined savers. If you are saving to spend, TFSAs may be more appropriate.

Hello Jim,

This might be too complicated a question, but here goes. Every year I manage to invest $10,000 in RRSPs. However, my portfolio has taken a 20% loss over the last two years, and I'm thinking that rather than invest the money into RRSPs this year, that it would make more sense to use that money to pay down my mortgage. I have a 5-year variable rate mortgage on a $297,000 home, the mortgage expires on May 2012, the current interest rate is 2.6% and the balance is $163,000. Can you advise?

Many thanks,

Robert

Jim Yih: The root of your question is whether it is better to buy RRSPs or pay down a mortgage. The easiest answer is that both strategies are financially productive strategies. Either way, you are improving your net worth. I’ve always said that paying down debt can be a great investment.

If you dig a little deeper, the RRSP will likely give you more bang for your buck because the benefit of the tax deduction alone outweighs the interest you will save especially at 2.6 per cent which is a phenomenal rate. The most prudent strategy is to buy the RRSP and then take your tax refund and pay down your mortgage. In other words, do both by using the government money to pay down your mortgage.

I see the wide swings in the stock exchanges, one day it is up 200 points and the next down 300 points for example, how much these fluctuations are due to manipulations by the hedge funds (derivatives, cyber futures) people hiding under numerous shell companies?

Jim Yih: Hi Roger,
Unfortunately, I don’t really know the answer to this question. My unqualified position is that hedge funds are playing a role in the market fluctuations but to what extent, I don’t really know. I think the information era is also a contributor to the fluctuations because information is instant. Also, the ability to react to that information is also instant.

What is the real return on Canadian Real Estate over the last 50 years? How does this compare to equity returns in the TSX 60/S&P composite index?

Jim Yih: Sorry, I don’t have this data but I think equities have outperformed real estate by a little over the long term. Canadian real estate has done well in recent times but remember for a long time real estate prices were flat.

Moved investment to cash in Oct, within RRSP, when should I move back to mutual funds?

Jim Yih: Sorry Robert, market timing is not something I know about. I believe markets are random and unpredictable. If I answered, it would just be a guess and that’s not fair to you.

I'm 58 and have always been a saver. Now I find that people like me need a "bail out" from the low rates available everywhere in Canada. What is your recommendation for some one who has 250,00 in cash available (currently in low interst bearing GIC's)

Jim Yih: GIC interest may be low because of the economy but at least they are still safe and guaranteed. I believe laddering GICs is the best strategy to manage a GIC portfolio.

For example, you can take your $250,000 and break it down into 5 pots of money. With the first $50,000 invest for one year. With the second $50,000 invest for 2 years. Invest $50,000 for 3 years and so on. Whenever money comes due, you invest automatically for 5 years. Laddering gets you higher returns (5 year vs 1 year), diversifies for CDIC purposes and provides an easy management strategy for a GIC portfolio.

The other piece of advice I will give is to make sure you shop around for GIC rates. Most people have a tendency to put all their GICs with the same institution because it is convenient. However, shopping around is the easiest strategy to improve returns. One way to do this is to find a registered deposit broker who shops rates. Go to www.FCIDB.com for more information.

Is it better to buy or rent in Vancouver's current housing market?

We've got our mortgage deposit ready - where can we put it as we wait?

Jim Yih: I am not qualified to talk specifically to the Vancouver housing market but my general thought is I have always been a big fan of owning over renting. In fact, people’s homes have been their best investment over the past decade. If you think about it, people who rent are often benefiting the people who own the properties they rent.

Studies also show that people who own tend to be better off financially for the most part.

2009 brings the new tax free savings/investment account. Is it something we should be seriously considering?s

Jim Yih: Absolutely. See some of the comments above on TFSA.

TFSA vs RRSP with a twist!
It appears the majority of experts advise the RRSP route is still more beneficial and any remaining savings could be used for TFSA, however in the case of a family with strong defined benefit pensions (as opposed to defined contribution), I wonder if it wouldnt be the opposite. Please advise.

Jim Yih: You bring up a great point. I talked about this briefly in an answer above. RRSPs are ideal for people who contribute when they are in a higher tax bracket then when they take the money out of RRSPs in retirement. For people with pensions, there is a possibility that pension income plus CPP and OAS will actually put them into a higher tax bracket making it difficult to get the money out of RRSPs at a low tax bracket.

Remember this is especially the case where people with defined benefit pension plans have lots of years of service and plan to retire when they are eligible for CPP and OAS (between age 60 and 65). If you plan to retire early (before age 60), you still may have the opportunity to get money out of the RRSPs at a lower rate.

The only way you will know is to get someone to do some retirement projections about your income in retirement.

What to do with available cash? I have no debt, a house fully paid for, thirty years before retirement, tens of thousands in cash and little tolerance for risk. It seems there is no safe bet for old fashioned cash to produce any type of significant return these days. What do you suggest?

Thanks Jon, I am in a similar position so I utilize a high interest bank account for my savings. Shop around as there are lots to choose from. We aren’t talking huge returns but better than conventional bank accounts, money market funds and even one year GICs in many cases.

I plan to utilize the TFSA. I can only put $5000 for me and $5000 for my wife but still there will be no tax on the interest.

Jim, Do you tihnk they will raise our CDIC rate upwards like they did in the USA?
$100000.00 to $250000.00?

Thanks.

Jim Yih: I certainly hope so. That would be great! However with tightening economic times, this may not be a priority. We’ll see!

Hi:
Its' RRSP season - as the market appears to be coming back, do you have any tips on what type of RRSP to purchase? is there such a thing as an RRSP that guarantees your initial investment while still benefitting from the tax break?

Jim Yih: I’m sure you have heard this thousands of times but investing is personal and there is no such thing as the best investment. What may be better for one person may not be better for another. That’s precisely why the investment industry takes such significant steps to ensure that financial institutions and financial advisors take the time to complete the Know Your Client (KYC) forms.

There are lots of investments that guarantee your capital. For example, there are GICs, index linked GICs, and savings accounts which are all RRSP eligible. Make sure you shop around because there are no shortage of options.