Stock market:
falling, recovering, and rising

Investors know that stock prices ebb and flow daily, depending on the information that's circulating in the markets at any given time. Portfolios experience good runs, where values rise for an extended period of time, and bad runs, where values fall significantly. In between is the land of recovery, where the value is above the most recent low point, but not yet above the most recent high point.

September 2013 marked the fifth anniversary of the Lehman Brothers collapse, which sparked the onset of the financial crisis and the subsequent meltdown in global markets. Still, our economic landscape is the view we see as we travel along the road to recovery, often dubbed a sideways market.

A sideways trend occurs when the forces of supply (sellers) and demand (buyers) are nearly equal. There is uncertainty—competing story lines about the state of the global economy—and hence the lukewarm outlook for corporate earnings. Because stock prices follow earnings growth, it makes for lots of up-and-down swings.

So why do investors put up with this volatility? Simple, over time markets rise more often than they fall. Otherwise stocks couldn’t earn a better long-term return compared to cash and bonds.

Canadian growth in 2013 is tepid at 1.7 per cent, according to the Conference Board of Canada. The consensus outlook for 2014 is a little better: roughly 2.3 per cent. Improving U.S. fundamentals, like employment growth, consumer debt reduction, new home sales and manufacturing activity, continue to support the prospect of a renewed acceleration of U.S. and global growth next year.

Canada benefits from better U.S. conditions and so our stock prices may follow. Even if 10-year government bond yields climb to 3.5 per cent, as BMO Capital Markets predicts, the environment will remain positive for stocks. Alternative choices, like interest-sensitive bonds, remain comparatively unattractive.

When it comes to investing money, it’s counterproductive to let recent events skew your perception of the future. WDS takes the long view, with a three-to-five-year investing horizon in mind. Our experienced portfolio managers know that the key to successful investing is simple: keep buying quality companies at good prices. At this point economically sensitive sectors, like technology, industrials, and energy, present opportunities.

Here at WDS, we believe the stock market is the place to be, and that it will do better still as investment capital flows back into stocks. We have no idea when this particular prolonged sideways market will end, but it will. They always do.

RESULTS
at a glance

Long-term interest rates rose this quarter, with negative impact on fixed income returns. Otherwise year-to-date values are positive—with the notable exception of gold—and the U.S. markets continue to outperform ours here in Canada.

ASK & ANSWER
RESPs: Can I avoid the 20 per cent RESP withdrawal penalty if my son doesn't pursue post-secondary education?

ASK
My youngest son quit university after his second attempt, with no plan to ever return. His older brother finished university and is now working. The family RESP has been open since my first son was born in July 1989, and there's still money left in the plan. I'm told that a 20 per cent tax penalty applies if the RESP is collapsed. What can I do to avoid the hit?

ANSWER
RESPs have three notional balances: Canada Education Savings Grants (CESG), contributions, and income. The CESG portion is equal to 20 per cent of the contributions made to the plan until the beneficiary reaches age 17. When the plan closes, different things can happen depending on what kind of balances remain.

1. The CESGs are returned to the government, because it provided them in the first place.
2. The contributions are returned to the subscriber— the person who opened the RESP— without any taxation or penalties.
3. The rest is called an Accumulated Income Payment (AIP), which, as the name implies, consists of earnings on both contributions and CESGs.

Now, as a subscriber, you may withdraw the AIP portion providing the following conditions are met:

• The RESP was opened at least 10 years ago;
• The subscriber is a Canadian resident;
• and All beneficiaries of the plan are at least 21 years old and not currently pursuing post-secondary education.

Taken as a cash payment, the AIP portion is subject to two different taxes. The first is your regular income tax at the rate you normally pay. The second is a further 20 per cent penalty that's levied.

Fear not, though! The tax can be deferred and the penalty avoided if you (the subscriber) have sufficient RRSP-deduction room available and the funds are rolled over into that plan.

My advice is to do a little advanced planning, which can help you sidestep the potential tax pitfalls:

1. Designate and track RESP withdrawals so you can use them to your or your child's best advantage each time.
2. Plan ahead for contingencies so that you don't forfeit any savings, including the CESGs.
3. If need be, reduce your RRSP contributions appropriately so that you have enough room for an AIP withdrawal.

RESPs are complicated, but they are still the best way to save for children's post-secondary education. Speak to your wealth advisor. They know the in-and-outs of these plans and can help you make the most of them.

Visit the CanLearn site to get more details on RESPs or read The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians by Mike Holman

WDS READS
A Library Journal 2012 Best Business Book of the Year

The Instant Economist: Everything You Need to Know About How the Economy Works

Timothy Taylor, Plume: Penguin Group (USA), February 2012 Managing Editor of the Journal of Economic Perspectives

Many of us want to understand the economy well enough to hold our own in everyday conversations. I’m often asked, “If there’s one book I should read, what is it?”  I recommend The Instant Economist. It covers all the bases.

Author Timothy Taylor’s purpose is to help his readers understand the economist’s way of thinking. Economics, he says, is not about predicting the future. Nor is it about taking political sides. Rather, it’s a framework for coordinating decisions about what is produced, how it’s produced, and for whom. The bottom line, which is relevant to all public policy debates, is that trade-offs are unavoidable.

Admittedly, the specific examples Taylor cites in the book are U.S.-centric. But in no way does that detract from its content or its message. Similar types of government and financial institutions exist here in Canada and perform similar roles.

Reading The Instant Economist certainly furthered my grasp of many global dynamics now at play. It offers the knowledge and sophistication to understand the issues—all the issues—so anyone can understand and discuss economics on a personal, national, and global level.

Book Description

Economics isn't just about numbers: It's about politics, psychology, history, and so much more. We are all economists-when we work, save for the future, invest, pay taxes, and buy our groceries. Yet many of us feel lost when the subject arises. Award-winning professor Timothy Taylor tackles all the key questions and hot topics of both microeconomics and macroeconomics, including:

Why do budget deficits matter?

What exactly does the Federal Reserve do?

Does globalization take jobs away from American workers?

Why is health insurance so costly?

Here's One Aspect of Investing
You Don't Have to Worry About

Canadian Investor Protection Fund (CIPF) - Download PDF

Investment firms rarely become insolvent. Still, it's good to know the CIPF exists to ensure your cash and securities are returned to you, just in case it ever happens.

A commonly-held but misguided belief is that the CIPF limit depends on the total size of your account. Actually, the CIPF $1-million limit applies if you suffer a loss of assets, referred to as a "shortfall".

A shortfall is the difference between the market value of your account and what the insolvent firm can return to you. Even if your account exceeds $1 million, any shortfall will likely be CIPF protected. Why? Because losses are shared among the financial institution's customers in proportion to the net assets held at the insolvent firm.

Here's a CIPF example for an account with assets exceeding $1 million. In a $2 million account:

Shortfall allocated = $100,000 (5% of $2,000,000)
CIPF coverage limit = $1,000,000
Loss to Client = NIL

Be sure to check the Member Directory on CIPF's website to confirm you are dealing with an IIROC Regulated Member. That membership is your insurance policy in the unlikely event the institution should fail financially.

FRIENDS, FAMILY MEMBERS AND WDS

Canadian baby boomers are falling short, says an August 2013 study by BMO Wealth Institute. On average, the report says, these people will fail to meet their retirement savings goal by more than $400,000. Yet the financial services industry still focuses on convincing individuals that the “right” investments are the key to their retirement dreams. Don’t you believe it.

Truth be told, many people just don’t put enough money into their retirement savings to maintain their current living standards when they stop working. Saving too little is not just a problem for low income households. It affects middle and high-earning ones, too. The best solution is to understand how much money you’ll realistically need to maintain your lifestyle when you retire and then work with a trusted investment professional to evaluate whether or not you’re on track to reach your goals.

When you spot a need for advice that we might help fill, have your friend or family member come talk to us. We want to help.

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.