Category Archives: InvestorLine

Unstable World Equity Markets: Should I Sell Now and Buy Back In After the Crash?

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Mr. Trump won and whether you hoped he would or not, you likely know that the American and world stock markets are jittery wondering how many of his pre-election promises he intends to keep. Will he really tear up the NAFTA? If he’s building a wall, how much concrete will he need? Will world investors pull their money out of US corporations? Some traders who call themselves investors are wondering if they should sell off their equities now, keep the money in cash, and then buy back in after a significant world stock market drop.

Why Do Brokerages Love Uncertain Markets?

There’s someone who will definitely make money if you sell your holdings now and buy back in later: the brokerage. You’ll be paying a fee on each position you liquidate and paying another fee for each time you buy a new equity or ETF to get back in the game. They win on both plays.

“Churning” investments is always a source of income for brokerages. Brokers with their clients’ best interests at heart never buy or sell investments just to earn commissions. Unscrupulous financial advisors, however, won’t discourage and might even encourage customers to rack up extra commissions.

What Should I Do If I Don’t Know Which Way the Markets Will Go or When?

The truth is no one is always accurate predicting which way a stock market will move and when. Some people have better luck at it, which they almost always attribute to skill, but no one has a perfect record.

I would not sell shares of equities or ETFs just because the market MIGHT move down.

The Benefit of an Asset Allocation Plan That Designates Fixed Income and Equity Proportions

Instead of trying to guess about the markets, I prefer to use an old trusty technique: asset allocation.

I set an amount to hold in “safe” non-equity investments and an amount to hold in equity investments.

To make the amount useful, as I’m still saving money each year, I set it as a percentage of my total holdings. Because I am incredibly risk-averse, as discussed many times here, I have set it at 50/50 even though I have a long time till retirement.

I re-balance to stay within that 50/50 split on a regular basis.

How Does Setting a Percentage for Safe Fixed Income and Riskier Equity Investments Help Make Market Timing Decisions Easier?

Why does this strategy make my investing decisions easier?

Well, if the stock market falls suddenly, my % held in equities drops. For example, it might drop from 50% of my total monetary assets to 35%.

If it does, I then have too much in my “safe” fixed income investments. I now have 65% in cash, GICs, and bonds.

So I use some cash to buy more equities to get back up to 50%. If I can, I use my “new” investing money that I’m saving from my income. If I can’t, I use some of my fixed income cash or sell some bonds to get the cash I need.

Similarly, if the stock market bubbles up to all time highs, my percentage of equities might grow to 65% and my fixed income by comparison drop to 35%. If I don’t have enough “new” money to bring my fixed income back up to 50%, then I sell a bit of my equity holdings to return to a 50/50 split.

Does Keeping a Fixed Asset Allocation Help Avoid Buying High and Selling Low?

As  you can see from my descriptions above, keeping my 50/50 split forces me to sell high (when my equities have grown too quickly for my fixed income to keep up) and to buy low (when my equities have fallen in value too low to match my fixed income.)

I don’t have to actually guess if it’s a “low” or “high” market. For ME the market is high or low and the decision is made.

Does This Strategy Work All the Time with 100% Optimization?

I have no idea! I just know it’s working for me, so far. I’ve read the theory in many investing books as well. So far I haven’t read anything that says it is a terrible idea.

If you are investing for a long-term goal (e.g. 15 years or more in the future) this is a strategy I would suggest you consider.

Won’t Another Strategy Work Better?

Decide for yourself whether an alternate strategy is more likely to out-perform this one. Don’t forget, though, to include the emotional factors and the cost of indecision of any potential strategy. For example, trying to randomly guess when to sell and when to buy back in is a difficult process. It tends to lead to emotional distress and second-guessing.

What Am I Doing Differently With Our Investments Now that President Trump Has Been Elected?

Nothing, yet. I’m not selling anything right now, and I will invest my new money into whichever asset class is out of whack with my allocation plan. If the markets tank, I will re-balance as best I can.

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Do you try to keep a certain split between fixed income (cash, GICs, bonds, possibly certain types of preferred shares) and equities? Does it help you decide when to buy and sell? Please share your views with a comment.

Why Might a Second RESP for a Niece, Nephew, Grandchild, Godchild or Other Loved Child be a Good Idea?

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Last week I pointed out some of the possible drawbacks of having two Registered Education Savings Plans for the same child. There are some cases, though, where it might be a good idea to open a second RESP for a loved niece, nephew, grandchild, godchild or other loved one.

Using a Second RESP to Minimize Income Tax Payable On Savings for Post-Secondary Education

You don’t have to open a RESP to help a child save for their post-high school education. Why not just invest the money, pay income tax annually on any profits at your own personal income tax level and then write a cheque for the child when they start their university or college education?

Well, if you know the parents will not use the full $50 000 in RESP contribution room per child, it may be aggravating to see the potential tax savings wasted.

Contributions to a Registered Education Savings Plan allow the investments to grow tax free until the child takes it out. If the child is in a low income bracket when they take out the money, and most students are, then the income tax paid on the income (dividends, capital gains, interest etc) generated over the years by the contributions to the RESP may be lower than the income tax paid if the contributor declared the annual earnings on their own personal income tax return.

Using a Second RESP to Reduce Risky Investment Choices for Savings for University, a Trade, or College

You might also want a second RESP, if you do not trust the investing choices that would be made by the persons who set up the first RESP, such as the parents. If you think the parents are investing in choices that will result in the RESP losing money, you may not want to give them even more money to invest unwisely!

In this case, you would contribute to a second RESP up to the amount that the parents are not “maxing” it out. There is a lifetime maximum of the total of all contributions to all RESPs for a child of $50 000. So you can only contribute if the parents have left enough room.

Using a Second RESP if the Contributors for the First RESP Are At Risk of Bankruptcy or Debt

You might also want a second RESP if you don’t think the parents are financially stable.

Contributions to a RESP can be withdrawn at any time by the contributor. There is a penalty: the CESG earned by those contributions must be re-paid immediately to the government. And there is tax owing on any income (interest, dividends, capital gains etc.) earned by the original contributions to the RESP. And there may be a penalty tax as well, depending on what is being withdrawn and when.

If you think the parents might get so desperate for cash that they would withdraw the contributions from their child or children’s RESP to spend themselves, then you might be wary. You might not want to give them cash to contribute themselves to the RESP they opened. If they contribute it, then they can withdraw it. And you can’t stop them, nor can their child. You may want to contribute to a RESP you opened, so that only you can withdraw the contributions, which you would undoubtedly wait to do until the child needs the money for their education.

Using a Second RESP If the First RESP is a RESP Group Plan With a Poor Reputation

If the first RESP is a group plan RESP and the parents decide later that they do not feel it is a good investment, then a second RESP might be helpful.

If the parents can reduce their contributions to some minimum in the group RESP that still leaves them with annual RESP contribution room, they might want to open a second RESP and use it for all of the additional contributions. This could be the case if, for example, they are not sure their child will attend a post-secondary education program that meets the requirements for payout of the group RESP.

Also, if the parents are nervous that they may have to take out their RESP contributions (due to a financial emergency) before the child goes to post-secondary education, they are more likely to be able to withdraw the contributions without penalty from a standard personal bank RESP than from a group plan.

If the parents are not contributing the maximum to their Group RESP plan, you could also open a second RESP and contribute it to the maximum. You would have control over the investments for that second RESP even if you couldn’t change anything about the Group RESP itself.

We only have a single Family Plan RESP for our children. I can see, though, that there are times when two RESPs per child might be the right solution.

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Do you have a second RESP for a loved child? Please share your views with a comment.