With the occurrence of the subprime market crisis, and consequent affect on the Stock and Equity Markets, many consumers are wondering what is going to happen to their investments. The volatility of the market has affected old and young alike; it’s not only the Baby Boomers whose retirement funds are being affected, but young families who are interested in investing in RESPs for their children’s education are also affected. The big question being asked by consumers is: What do I do with my Investments; do I leave them where they are and wait it out, or do I withdraw them?
Consumers are torn between withdrawing their registered investments and leaving them where they are, in the hopes that the market direction will change and we will move out of the global recession we are in. Young families are confused as to whether they should wait to begin investing for their children’s education and for their own retirement. And then you’ve got retirees who were unaware that their RSPs are stock and equity backed and are baffled at the fact that their retirement savings have decreased drastically, wondering how they are going to maintain their lifestyle now that they have lost the majority of their retirement income.
Numerous studies have concluded that the main sources of retirement are typically government pensions, company pensions, registered investments (RSPs), and non-registered investments (GICs or Mutual Funds). Would you be surprised to learn that RSPs are our second largest source for retirement income, and that the majority of these RSPs are stock or equity based? Would you be surprised to learn that their value (if stock based) is directly associated to Consumer Confidence and the Profitability of the company they are invested with? Leaving you with little control of your investments? In saying this, how would you respond to the economic crisis?
Let’s begin by examining what would happen if you left your registered investments where they are. On Friday, The Conference Board of Canada reported that Canadian Consumer Confidence has dropped to levels not seen since 1982, when the country was in recession. Based on a poll of 2000 people between October 2 and 8, the conference board said its index of consumer sentiment fell 11.9 points to a reading of 73.9; the weakest point since the third quart of 1982*.
This drop in Consumer Confidence has a direct correlation to the value of your stock backed RSPs as the value of these RSPs is based on the level of consumer confidence (the demand for a stock and the amount willing to be paid) and the profitability and dividend yields of the company whose stocks you are investing in. When consumer confidence drops, as it has, it affects the market capitalization and stock valuation of your investment, ultimately decreasing the value of your stocks, and consequently the value of your stock backed RSPs. By leaving your investments where they are, you are “hoping” that consumers will all of a sudden decide to begin investing again and that this sudden surge will “hopefully” drive up the value of stocks and consequently again, the value of your stock backed RSPs. This strategy is highly subjected to the volatility of the market and is based on your confidence in other consumers, which, as evidenced above, is currently at a record low. Subsequently, leaving your registered investments in stock and equity backed funds is not ideal.
Let’s move on to evaluate what would happen if you withdrew your registered investments. Each of the different types of investment income – interest, dividend, and capital gains, is taxed differently. The amount of tax you pay is also based on your marginal tax rate. With that being said, the interest component tends to be affected the most as it is taxed annually at your full marginal tax rate, the way your employment income is. You’ll receive interest income from investments like GICs, Canada Savings Bonds, term deposits, and mutual funds containing money market investments and bonds. Dividend income comes from owning common or preferred shares in a stock company. You’ll pay less tax on dividend income than on interest income because of the dividend tax credit (this acknowledges that the stock company has already paid tax on the income they are distributing to shareholders). Dividend income received from foreign corporations is not eligible for this tax credit, and is taxed in the same way as interest income. Capital gains may result from the normal activity involved in managing an investment (for example, selling an asset for more than was paid for it). You pay tax on 50% of the net capital gains distributed by the fund (total capital gains minus total capital losses in a given year).
In general, to minimize taxes and take advantage of the tax treatment of the various sources of investment income, you might want to continue to hold your interest paying investments within the RSPs, or registered investments, you currently have. In other words, cashing in your registered investments is not an ideal response to the market crisis.
So, if leaving your stock and equity backed registered investments where they currently are isn’t ideal, and if cashing in these registered investments isn’t ideal, what is?
Transferring your Registered Investments to a fund that is not affected by the volatility of the Stock and Equity based markets is the ideal answer. You are not “cashing in” your investments thereby ensuring you are not required to pay taxes, but you are also not relying on the confidence of other consumers to dictate the value of your stocks and ultimately the value of your registered investments. A fund that is Hard Asset Backed, not stock or equity baked, where you can earn a fixed rate of return over a locked in period, is ideal. So where do you find a fund that provides all of the above?
The MBN (7-1) Bond Fund does just that. It is an RSP eligible bond that provides a 7.0% annual fixed rate of return compounding over a 4 year period, which provides an annualized rate of return of 7.7%. This fund, unlike most other funds, is Hard Asset Backed, meaning it is secured to real estate which is a tangible asset. Hard Asset value offers an objective measure of value, based largely on supply and demand economics (market forces) and the law of substitution. All of these factors, when combined, make for an extremely secure investment and create the asset backed investment, rather than stock backed investment, that most Canadian Financial Institutions are comfortable lending on. Ask yourself this: What do most of the Major Banks lend on? Real Estate (mortgages) or Stocks? The answer is Hard Asset Backed Mortgages, or Real Estate.
With the MBN Bond Fund the principal is backed by real estate and the interest is covered by a performance bond. This gives you peace of mind with regards to the security of your investment.
By transferring your registered investments to the MBN Bond Fund there are no tax implications to be had as you are moving your investments from one Registered Fund to another; you are not relying on consumer confidence to increase the value of your stocks; and you are removing the market volatility that has caused the decrease in your investments.
By doing your research and being a knowledgeable investor you can protect your investments; your lifestyle, your children’s college funds, and your retirement income. Your investments are too important to leave to chance. Contact your MBN Bond Fund Specialist at 1-877-212-8002 or www.mbnbondfund.com to learn about how you can transfer your Registered Investments and begin earning a fixed 7% rate of return.
In addition to the Bond Fund, MBN offers a financing team with Mortgage Associates specialized in first-time home buyer financing and investment property financing.
To learn more about your mortgage options please contact your Calgary and Southern Alberta Mortgage Specialists at MBN Mortgage at 1-866-955-9662 or http://www.mbnmortgage.com .
MBN Mortgage
*CBC.ca
