Financial Il-literacy
It Challenges All Ages

lit•er•a•cy (noun): knowledge of, or competence in, a subject or area of activity

Promoting financial literacy among young Canadians is a hot topic, and I strongly support it. But a recent encounter awakened me – again! – to the reality that this challenge isn't necessarily age-related.

At a Twenty First Century Leadership Tune-ups meeting, I met Sue, a well-educated, accomplished, retired librarian. This was no ordinary woman, and neither was her life experience. Most of her career had been spent in the Middle East. Now back in Canada, she was facing life on her own, having recently lost her husband to Alzheimer's disease.

That weekend, I talked about my own goals. I said that I wanted to share my knowledge and experience as a writer and speaker to help people improve their financial literacy. Afterwards, Sue came up to me and admitted that she'd never heard the term "financial literacy" before. Her life's work had been about promoting literacy, but never as it related to money. Until her husband became ill, she'd pursued her career, lived well and never worried about a dime.

Now middle-aged, Sue realized that if she wanted to be able to continue her independent lifestyle and maintain her financial security in the future, she was going to have to educate herself. Her situation called for more than just getting "information". She needed to find a financial advisor to help her make well-informed decisions. But where to begin?

Sue's dilemma is a common one. The best way for people like her to start on the road to financial literacy is to ask themselves this question: "How can I find financial advice that I know I can trust?"

Fortunately, the answer is as close as your computer. There's a wonderful website called Know Your Financial Advisor (www.kyfa.com). It allows investors to search for advisors according to their own, individual needs and specifications, as they themselves see them. KYFA's self-described goal is to bring simplicity to the search for trusted financial advice. I think they make a pretty good case for doing just that. It's about time somebody did!

Suggested link: Financial literacy may decline with age - MoneySense

"Financially fit" investors
get best results by sticking to the program

These are turbulent times. So we need to be able to accurately read your level of investor fitness to give you good investment advice. This means constantly evaluating your ability to handle the market's rollercoaster ride, under both good and not-so-good conditions.

One of our most important responsibilities is preparing your portfolio for short-term price setbacks without forfeiting its longer-term positive results. But we understand how hard it can be to stay the course when every time you open the newspaper or turn on the TV analysts are spouting more confusing, contradictory and unsettling news.

Here are six practical steps that we at WDS have taken to adapt your investment portfolio to the times and help even out the bumps in the road.

1. Set a comfortable equity target zone

Contrary to popular belief, personal risk tolerance is a relatively stable measure. It's not at the mercy of market conditions. Come what may, the right asset mix means your portfolio's results stay within your comfort zone and allow you to wait out the better times ahead.

2. Keep a close eye on asset allocation

As this recovery moves along in fits and starts, we stick closely to your individual target asset mix. Recent conditions have warranted being a bit more risk-adverse. We've used our built-in flexibility to lower the amount of equities in many of our clients' portfolios by about 10 per cent.

3. Spread the risk; diversify more to protect capital

With long-term interest rates breaking record lows, investors' flight-to-safety is in full swing, possibly at the wrong time. Bonds, which are traditionally lower-risk vehicles, may actually be more risky than stocks in the long run. Stocks may be cheap, but with the state of the global economy right now, they're also risky. So, what to do? Be prudent and take a balanced approach. You can't go wrong with a careful mix of well-chosen bonds, debentures, and preferred and common shares of blue chip companies.

4. Build a higher-yielding portfolio

The total return in any portfolio is a factor of two things: income and capital gains. Right now, stock price volatility makes sustained capital appreciation (capital gains) hard to come by. So we're creating more reliable sources of portfolio income, i.e. corporate bonds for interest and income-generating equities for distributions and dividends.

5. Cash-flow strategies for income requirements

Many WDS clients withdraw funds from their portfolios to supplement their retirement income. For you especially, we try to hold one-full year of spending money in cash and cash-type securities. This keeps us from having to sell securities when their value is low in order to get you the money you need.

6. Think defensively; wait patiently

Right now, down-shifting to lessen the risk associated with equities may hamper your portfolio's performance when the markets start to improve again. But in these shaky times, it can be beneficial. So we convert some carefully chosen equities to cash and put that in a high-interest savings account. This way, it still makes some money and stays handy for us to move into investments again when the time is right.

These days, the markets hinge more on political events than economics. No matter what the pundits say, what happens tomorrow is anyone's guess. Until the financial situation in Europe stabilizes a little, we can probably count on rocky markets for a while yet, at least through this summer.

The best strategy is to stay on top of economic issues and monitor the risks. It may take some time, but history has shown us that high-quality investments with top-performing companies will pull through. With a little more patience and perseverance, we still believe we'll win the day.

TAX-FREE?
You Don't Have to Worry About

Rarely has such a well-intended tax-relief program caused so much confusion. The biggest conundrum involves the rules around withdrawals and re-contributions, which can be quite taxing (!!!) if not timed correctly. Here’s the short course.

No tax is payable on TFSA investment income UNLESS you happen to over-contribute. If you do – even inadvertently – a tax of 1 per cent per month will apply on an excess TFSA amount.

What puts regular people offside? Those complicated and poorly publicized rules about withdrawals and re-contributions! The often-overlooked fact is that a withdrawal from a TFSA can only be added back to make up part of your overall TFSA contribution room in the following calendar year.

Here’s an example:

In January 2011, your total $15,000 of TFSA room – the maximum you could have contributed up until that time – had been completely used up. In March, a major home repair came up and you withdrew $10,000 from your TFSA to pay for it. Later, in June of that same year, a guaranteed investment certificate (GIC) matured outside your TFSA. So you contributed the entire $10,000 value of the GIC to your TFSA, thinking you could put back the same $10,000 that you took out in March. Wrong!

According to the Canada Revenue Agency’s (CRA) way of seeing things, you had an excess TFSA amount of $10,000 for each of the seven months from June until December, because you had reached your maximum contribution ceiling back in January. (I know... I know….!)

Most people only realize that an excess TFSA amount exists when a letter arrives from CRA. Then you have three options: 1) sign and pay; 2) correct the facts and amend your TFSA records with CRA; or 3) challenge the proposed assessment, with what they consider to be good reasons.

The 2011 TFSA Return is due June 30th, 2012. Don’t miss this deadline. Get professional advice to correct the situation. Otherwise, the CRA will add insult to injury with late-filing penalties, too!

Visit Canada Revenue Agency to complete TFSA Return (Forms RC243 and RC243 SCH A)

ASK & ANSWER
Budget 2012: Changing the "Age" in Old Age Security

ASK
I've read that the federal government is upping the age at which people will be able to start collecting Old Age Security. I'm retired and will turn 65 in August 2012. Will I still be able to collect my OAS pension benefit this September?

ANSWER
Absolutely! The changes proposed in Budget 2012 won't impact you. Anyone aged 54 years or older as of March 31, 2012 (those born before April 1, 1958) will not be affected by the changes to the age-eligibility rule. Nor will the new rules impact people who are already receiving OAS benefits.

Increasing the OAS age of eligibility from 65 to 67 years will be phased in gradually between 2023 and 2029. Anyone can visit Service Canada's website to find the exact month in which they will become eligible for their first payment.

We're all living and staying healthy longer, so many people are now choosing to postpone retirement. If you're still working after your 65th birthday, you might consider the new voluntary deferral of the OAS pension. Beginning in July 2013, the lifetime benefit will go up 7.2 per cent for every year you postpone it. So the later you start receiving it, the larger your monthly cheque will be when you do! Talk with your financial advisor to see if this strategy is the right one for you.

WDS READS
Book Review THINKING, FAST AND SLOW

Roger Daniel Kahneman, Farrar, Straus and Giroux, October 2011
Winner of the 2002 Nobel Prize in Economic Sciences

Economics 101 theory taught us about fully rational investors in the book dubbed "Econs". Econs are what humans would be if we operated in computer mode all the time, making careful, well-thought-out decisions without the tugs of emotions and subjective experience.

Thinking Fast and SlowOf course, we all know that individuals are not Econs. Based on his seminal work in psychology, Kahneman explains that there are two selves that all humans have – a fast, automatic one that operates mostly subconsciously and impetuously; and a slow, logical one that is usually conscious and deliberate. He then goes on to describe how our hard-wiring affects judgment and decision-making, both good and not-so-good. Thinking, Fast and Slow is a more challenging read that’s well worth the investment of time you might need to give it.

From the book description on the publisher’s website:

In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think and the way we make choices….He offers practical and enlightening insights into how choices are made in both our business and our personal lives – and how we can use different techniques to guard against mental glitches that often get us into trouble.

A testimonial about this book:

Daniel Kahneman is one of the most original and interesting thinkers of our time. There may be no other person on the planet who better understands how and why we make the choices we make. In this absolutely amazing book, he shares a lifetime’s worth of wisdom presented in a manner that is simple and engaging, but nonetheless stunningly profound. This book is a must-read for anyone with a curious mind.
- Steven D. Levitt, William B. Ogden Distinguished Service Professor of Economics, University of Chicago, and coauthor of Freakonomics and SuperFreakonomics

Suggested link: Balancing act: Why we misjudge risks – The Globe and Mail

FRIENDS, FAMILY MEMBERS AND WDS

Most day-to-day choices we make have financial consequences. Even buying that daily Starbucks coffee, believe it or not! But when a big moment comes along – like a divorce, a job loss, beginning retirement or receiving an inheritance – the stakes go up. That’s usually the time that people reach out for professional help.

If someone you know is money-challenged or experiencing a change in their financial circumstances – good or bad – please suggest they call us. Or, pass this e-newsletter on to them, and mention the link below to the “CONTACT US” part of the WDS website. There, they can tell us how best to get in touch with them. Contact WDS

We thank you for your support and appreciate all your referrals. Your confidence means everything to us, and we’ll work hard to justify it.