Market Review – WDS Investment Perspectives
Tackling real, but still manageable challenges

It was another roller-coaster year. Thankfully, investors finished off in better shape than the predominant doom-and-gloom predictions at the start of 2012 had anticipated. But there was no shortage of chills-n-thrills for political spectators and investors alike.

RESULTS
at a glance

The S&P/TSX Composite Index* advanced in 2012, closing up 4.0 per cent to finish at 12,433. The U.S. S&P 500** was 13.4 per cent higher at 1,426. The MSCI EAFE** rose 13.6 per cent, while MSCI Emerging Markets** outpaced, up 15.2 per cent.

Longer-term bond prices rose as yields declined further. The yield on the 10-year Canada benchmark fell to 1.8 per cent, while the yield on the U.S. 10-year benchmark closed at 1.78 per cent.

The Canadian dollar held up against the U.S. dollar, closing above parity at $1.005 per USD. Weaker foreign currencies ($U, € & ¥) had a negative impact on returns in Canadian-dollar terms.

In the energy sector, crude oil fell $7.01 (-7.09%) to close at U.S. $91.82/bbl. Gold bullion finished at US $1,675, up $109 (+6.96%).

*Returns based simply on price appreciation (dividends are excluded).
**Foreign equity indices based in USD.

RRSP OR TFSA:
WHICH IS RIGHT FOR YOU?

Tax planning is easy to understand. One: Paying less tax is good. Two: Paying no taxes is better. With RRSPs and TFSAs, you have it both ways!

These two plans are designed to do exactly what we want them to: help and encourage us to save money. Making the most of them can boost your personal net worth, so take a minute and figure out how best to use them in your wealth management strategy. Here are some refreshers.

RRSPs let you postpone taxes

When you’re earning income, you can contribute pre-tax income, and defer the income taxes that you’d otherwise have to pay on that money. Basically, the Government of Canada subsidizes part of your retirement savings. But all good things come to an end. With a few exceptions, you pay tax on every dollar taken out of RRSPs. The trick is to reap tax deductions when you’re paying high tax rates, and report it as income later when your rates are lower. The longer the money stays at work the better, too.

PROS:
Great tool for those with high taxable incomes
Harder to withdraw for those less-thrifty people

CONS:
Withdrawals are taxable unless used for buying a home or education
Contribution room does not replenish if money is taken out

TFSAs save after-tax dollars

Since 2009, more room has accumulated in Tax Free Savings Accounts every year. TFSAs are available to individuals who are aged 18 and older in the calendar year in question. Everyone gets the same amount of savings room, earners and pensioners alike.

There’s no use it or loose it rules, so unused TFSA room carries forward indefinitely without limits. In 2013, TFSAs are five years old. By now, a single individual has accumulated $25,500 of tax-free growth potential. Couples enjoy a $51,000 “tax-free” investment zone! When you withdraw funds, any money you’ve made in the TFSA is not included in your income, ever. TFSAs can be replenished after a withdrawal, but – and this is a BIG “but” – you must wait until the next calendar year to do so.

PROS:
No upper-limit age restrictions on making contributions
Withdrawals do not result in the permanent loss of contribution room

CONS:
Marketed as “save & spend” money, rather than long-term holdings
Over-contributions are penalized, if you break the rules

One for the ages

Ideally, you can maximize both your RRSP and TFSA contribution room, but sometimes you have to choose. The TFSA is perfect for short to medium-term goals, like saving for a car or a home down-payment. If you don’t participate in a retirement savings plan at work, though, don’t sacrifice your RRSP for too long. It’s hard to play catch-up with retirement savings. Start earlier – even with small monthly contributions – and get the magic of compounding working for you.

ASK & ANSWER
Get the benefits of a Disability Tax Credit Certificate

ASK
I've heard that people who have special medical challenges may be eligible for various kinds of income tax relief. What sorts of disabilities are covered by these programs? How can I apply?

ANSWER
These days, the word “disabled” doesn’t just refer to physical handicaps, especially where seniors are concerned. The older we get, the greater the chances that we’ll have to cope with impairments to basic activities of daily living. It’s sad to say, but for many, those impairments relate to mental deterioration.

Many of my clients are facing or living with these types of health challenges. So helping them and the people who care for them understand and take advantage of the Disability Tax Credit Certificate (DTC) is important.

It’s for those with serious health challenges. To be eligible, you must have a severe and prolonged mental or physical impairment that:

• “markedly restricts” you
  in at least one of the seven basic activities of daily living: speaking, hearing, walking, dressing, feeding, elimination or mental functioning necessary for everyday life.
• has lasted, or can reasonably be expected to last, for a continuous period of 12 months or longer.

Apply to the Canada Revenue Agency. A doctor must certify the condition on a prescribed CRA Form T2201, which can be filed at any time of year for approval (or disapproval). A DTC is of value for the time period stated on the form. So if you’ve missed out, you may be able to amend a prior year’s tax return. You don’t need to obtain a new form each year, but it’s CRA’s right to verify the certificate at any time.

Pay less tax. An approved DTC allows you to claim the $7,697 Disability Amount Tax Credit, reducing the taxes you have to pay. It also permits you to claim an extended range of medical expenses – for example, attendant care – either at home or in a facility.

There’s help for caregivers, too. To the extent that the DTC cannot be used by the person suffering the impairment, any unused amount may be claimed by a spouse. Medical expenses, including attendant care, can be claimed by either spouse, as usual.

CRA’s Guide RC4064, Medical and Disability-Related Information, provides further details of these credits which may be claimed in combination.

Along with all the challenges to daily functioning, a loss of mental acuity puts people at great disadvantage. Medical bills can mount quickly. So it’s important to get all the help and advice you can for yourself and your loved ones to defray some of the costs.

CFRA’s Jason McIntyre asked Kathy how best to prepare for the financial needs of disabled seniors. To listen to this radio clip, click Business@Night

WDS READS
THE SUCCE$$ EQUATION: Untangling Skill and Luck in Business, Sports, and Investing

Michael J. Mauboussin, Harvard Business Review Press, November 2012 Chief Investment Strategist at Legg Mason Capital Management

As long-time investors we intuitively know certain things about the behaviour of the stock market. Such knowledge – or during crashes, strong faith!!! – allows us to maintain discipline in the investing process. No other book ever satisfactorily explained the real-life dynamics at play in investing like The Success Equation.

For better or worse, Mauboussin’s idea of paradox of skill explains statistically why markets are hard to beat. If everyone gets better at something, the variation in skill narrows, as does the distribution of results. In the competitive investment industry, reversion to the mean exerts its power: high and low prices will tend to move to the average over time. In hyper-interactive systems like stock markets, identifying the cause of any given price movement is virtually impossible. So is predicting the market’s future direction!

Along a continuum of luck and skill, these conditions mean that luck becomes more important to the outcome in the short term. When luck is the greater force, a focus on process and a thoughtful assessment of what happens next makes for better decision-making.

From the book description:

"Much of what we experience in life results from a combination of skill and luck."
—From the Introduction

The trick, of course, is figuring out just how many of our successes (and failures) can be attributed to each—and how we can learn to tell the difference ahead of time.

In most domains of life, skill and luck seem hopelessly entangled. Different levels of skill and varying degrees of good and bad luck are the realities that shape our lives—yet few of us are adept at accurately distinguishing between the two. Imagine what we could accomplish if we were able to tease out these two threads, examine them, and use the resulting knowledge to make better decisions.

In this provocative book, Michael Mauboussin helps to untangle these intricate strands to offer the structure needed to analyze the relative importance of skill and luck. He offers concrete suggestions for making these insights work to your advantage. Once we understand the extent to which skill and luck contribute to our achievements, we can learn to deal with them in making decisions.

Showcasing Mauboussin’s trademark wit, insight, and analytical genius, The Success Equation is a must-read for anyone seeking to make better decisions—in business and in life.

Book Review: Michael J. Mauboussin’s ‘The Success Equation’ – Seeking Alpha

Here's One Aspect of Investing

At WDS, we know that our clients like to stay on top of their investments. Being informed allows you to ask us timely questions. So starting in March, we’ll be complying with new guidelines and sending you quarterly updates to your home or email inbox.

To ensure we help you make informed decisions, keep WDS up-to-date. Promptly inform us of any change of circumstance that might impact the type of investment choices appropriate for you.

FRIENDS, FAMILY MEMBERS AND WDS

People often turn to friends or family for financial advice. Some of their questions may require independent professional help. We all know that the most trusted referral comes from someone you know.

When you spot a need for advice that we might help fill, please suggest your friends or family members call us. Or, pass this e-newsletter on to them, and mention the “CONTACT US” part of the WDS website so they can tell us how best to get in touch with them.

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.

PLEASE NOTE: The information presented in this e-newsletter is of a general nature only and does not give advice on any particular matter. It is not intended to replace personal, professional advice based on individual circumstances.