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RRSP or TFSA or both? Let goals drive your strategy

As of January 1, you can now invest $5,000 annually into a Tax-Free Savings Account (TFSA). At the same time, you may be considering how much to put into your RRSP. If you can’t max out contributions to both, review your savings strategy.

What’s the difference?
You contribute to an RRSP with pre-tax dollars, while TFSA savings come out of after-tax income. Both have annual limits and allow you to carry forward unused contribution room. Both enjoy tax-sheltered growth, but you will be taxed on withdrawals from an RRSP. All TFSA withdrawals are tax-free — you keep every cent.

Each has its benefits
With higher contribution limits — $21,000 in 2009 — your RRSP is ideal for retirement savings, especially if youreinvest your tax savings. RRSPs promote long-term savings because withdrawals are taxed and can’t be returned to the plan, with a few exceptions that let you borrow from a plan to buy a home or go to school. In contrast, you may take money out of a TFSA and recontribute it later, and there is no upper age limit for contributing, as with RRSPs. TFSA withdrawals don’t count
as income, so won’t affect benefits like Old Age Security.

Both can work together
An RRSP-TFSA split may be useful if you have pension benefits that reduce RRSP contribution room, or to save more for retirement. You might use a TFSA to save for short-term needs or emergencies. You can use both to split income with your spouse. We can review your goals to set a suitable strategy.

Invest Like A Marathoner: Save Your Emotions For The Finish Line

An old saying holds that investing is a marathon, not a sprint. And just like marathon runners, long-term investors can experience the emotional ups and downs of running long distances — from euphoria when they’re ahead to discouragement if they slip behind or stumble. Managing
those feelings is the key to endurance and crossing the finish line.

We assess the suitability of mutual funds and other investments in your portfolio based on how consistent their performance is over the long term, and how well a fund’s characteristics suit your investment timeline, goals, and risk tolerance. To do this, we look for professional mutual fund managers who manage risk in many ways, such as through diversification of assets and holding true to their mandate and management style through changing market conditions.

Keep your perspective
This past year has been a particularly challenging one for investors all over the world, given the wild swings in the markets. Financial professionals stress the importance of maintaining a long-term perspective in making investment decisions — whatever the market conditions. As the illustration below shows, markets can rebound dramatically after a period of losses, producing
a respectable average compound annual return for those who stayed invested. This suggests that performance of any one mutual fund or asset class in any one year matters far less than the performance of your entire portfolio over many years.

Diversified portfolios gain over time
A balanced approach is used for many investment plans. For long-term investors, a goal may be to build an “all-weather” portfolio that does well when the sun shines, yet is positioned to withstand
damage from the occasional storm. Historically, such mutual fund portfolios have delivered superior returns over time. For example, the Morningstar Canada balanced global index of mutual funds — 60% in equities and 40% in fixed income — made money in 18 of the 22 years from its
inception in 1985 through 2007. Annual returns ranged from a loss of 6.5% to an eye-popping gain of 43.8%. The 22-year average compound annual return was 9.4%.

Emotions can mislead you
What’s been dubbed “the cycle of market emotions” is an investor’s worst enemy because it can prompt irrational behaviour to sell investments at a low point. As markets climb, the cycle starts with optimism followed by excitement, thrill, and euphoria as prices soar — prompting people to buy at the top. As markets decline, the cycle responds with anxiety, denial, fear, and panic. Near the bottom, discouragement may drive people to sell low. Eventually, as markets start to recover, the cycle begins anew, with hope and relief on the way up. Where do you now stand in this cycle?

Your timeline matters the most
Market fluctuations are inevitable, but you can still win in volatile markets with the right strategy and a portfolio of mutual funds or investments chosen for their longterm potential. Professional guidance can help keep your investment strategy properly aligned with your long-term goals.

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