Ten smart ways to raise your net worth
12:25:53 EDT Jul 13, 2006
WAYNE CHEVELDAYOFF
(Special) - Here are 10 basic strategies to help grow your net worth and your ability to have a comfortable retirement.
1. Resolve to live on a modest budget that leaves plenty of money to pay for a house and for RRSP and other investments. Sometimes this will mean living in a smaller house than your friends. Too many of us live pay cheque to pay cheque without a financial plan for adequate savings.
2. Start saving early. A person aged 25 starting with $1,000 and saving $100 per month thereafter in an RRSP, earning 8 per cent a year, will see these savings compound to $343,832 at age 65. Someone else starting at age 35 would have $150,918 and another person starting at age 45 would have only $61,561. For your own plan, use the retirement calculators located at financial websites.
3. Work hard at getting the best return on your investments at a reasonable risk. In the above examples, a lower annual return of 5 per cent would compound only to $155,292 for the person beginning at age 25.
4. Pay off your mortgage faster. On a $250,000 mortgage with an interest rate of 5.5 per cent, increasing the payment by $200 per month will save about $50,000 in interest over the 25-year amortization period and pay off the mortgage sooner.
5. In your investing, the focus on good returns should include a concern with costs. Money that isn't paid out is money that is saved. You shouldn't mind paying fees as long as you are getting good value for your money. But don't pay unnecessarily. In the case of Canadian bonds, for instance, it makes little sense to pay the typical management fee of 1.5 to 2 per cent annually if the portfolio manager is holding mainly government bonds. You can invest in government bonds yourself. The only time it is right to invest in bond mutual funds is when they are concentrating on corporate or overseas bonds, where it is important to have a manager doing the research and spreading the risk through diversification. Also, avoid mutual funds that mix stocks with bonds. The management fees, typically 2.5 per cent a year, for so-called balanced funds apply to the bond portion as well as stocks. With interest rates on bonds generally under 5 per cent in Canada these days, taking half of that away for fees is too much of a drag on return.
6. In buying stocks, don't be mesmerized by the dividend yield. Sometimes it is high because trouble is brewing. Instead, focus on companies that have consistently raised dividends in recent years. These types of stocks tend to outperform others over the longer run.
7. Build your portfolio to grow faster than the inflation rate. This will mean reserving a large component for equities and making use of real return bonds, which automatically give investors the gain in the CPI each year in addition to a real yield (currently around 1.7 per cent).
8. In your stock investing, aim to preserve capital by making use of stop-loss orders. Stocks that go up usually come down for some reason. The problem is that often the reason is not well known until it is too late. It is common for people to keep thinking of reasons why the stock is undervalued even as it is falling. If you raise the stop-loss price as the stock goes up, you will have a chance at keeping some of the gain when it starts coming down. This doesn't work perfectly but it is better than losing all your gain.
9. Save on income taxes by splitting income and investments with your spouse and children. In-trust accounts for children and spousal RRSP contributions and loans between spouses are the main tools planners use to minimize the tax load.
10. Don't get talked out of your savings by a slick operator. It is surprising how much financial fraud there is in our society, and sometimes it is hidden because people are too ashamed to speak out about how they got taken. Even when you are dealing with investment advisors, it is tough to get your money back on investments that turn sour. Choose your advisors wisely.
Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.
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