One of the easiest, oldest and most popular investment strategies is dollar cost averaging, but how does it work and who should do it?

The theory behind dollar cost averaging is quite simple really.  By investing the same amount of money on a regular basis (monthly, weekly or otherwise) you will buy fewer shares when an investment’s price is high and more when that price is low.  This will result in an investor having an average purchase price lower than the share’s average price.

Here’s a practical example of dollar cost averaging.  Let’s say we have two brothers John and Jim.  On September 30, 2000 John starts to invest $100 a month into the S&P/TSX Composite Index.  His brother Jim invests $6,000 as a lump-sum payment.  5yrs later on September 30 2005 John’s total rate of return is 90.97%* or 13.81% annually* and his investment value is $8,774.55*.  Meanwhile Jim’s total rate of return is 15.73%* or 2.96% annually* and his investment value is $6,943.77*.  While the difference may not always be this great, we use this as an example of how dollar cost averaging can help during a declining or fluctuating market.

            Other than the technical advantage of dollar cost averaging there are also a number of practical advantages.  First of all it allows you to “pay yourself first.”  Too many people get in the mindset of “I’ll pay my bills, do my shopping and invest what’s left.”  More often than not what’s left is nothing.  By setting up automatic monthly payments into your investment, it becomes viewed as an obligation that needs to be paid.  For many people this can be the biggest advantage to dollar cost averaging.

            Another way that dollar cost averaging can help is by allowing you to spread your contributions out over the entire year, which for many people is very helpful.  Most investors I speak to would like to maximize their RRSP contribution every year if they had the money, however a lot of people find it very difficult to come up with that lump sum payment right after Christmas.  Dollar Cost averaging helps these people to meet the goals they set for themselves by breaking that payment down over a twelve-month period.

Now you have a basic understanding of what dollar cost averaging is and how it can help.  The next step is to ask yourself if dollar cost averaging is right for you.  You should sit down with an investment professional from Langlois Financial Services Inc. to discuss your individual situation and which strategies might work best for you.

A Labour Sponsored Investment Fund (LSIF) is a type of mutual fund.  It is made up of investors who pool their investments and allow professional money managers to make investment decisions.  However where other mutual funds invest in public companies LSIFs invest in small to medium sized private companies.

            Investing in private companies helps the Canadian economy grow, because of the positive effect on job creation.  The federal and Ontario governments encourage investment into LSIFs by offering a combined tax credit of 30% on the first $5,000 invested in eligible LSIFs.  If you choose to invest in a LSIF which is primarily research oriented you may qualify for an increased combined tax credit of 35% on the first $5,000.  LSIFs are also 100% RRSP eligible allowing you to get your tax deduction in addition to the tax credit when you buy a LSIF in your RRSP. 

            As an asset class private equity has historically achieved the highest rate of return over time.  Returns in a LSIF are generated when companies reach a liquidity event by going public through an initial purchase offering, being sold to companies in a merger or acquisition or in the case of some funds principal repayments made on debt.  Because of the type of events that need to occur in a LSIF for it to show growth it generally takes longer to see gains but when they do occur they can be significant.  In order to keep the 30% (35%) tax credit investors must stay invested for a minimum of 8 years, allowing these private companies the necessary time to mature.

            Investing in LSIFs also gives investors a great opportunity to diversify their portfolios.  Since LSIFs invest in private equity markets, different variables cause values to change than in public markets, making it possible for their value to increase despite negative movement in other parts of an investor’s portfolio.  Holding private equity class investments in a portfolio has been shown to reduce overall portfolio risk, despite the inherent risk of investing in private companies.

            While LSIFs are not right for everyone, it may be the perfect investment for you. You should meet with an advisor at Langlois Financial Services Inc. to see if this is an investment class that should be included in your portfolio to help you reach your goals.

*Some of the information in this article is based on the FAQ section at www.vengrowth.com

The Home Buyer Plan (HBP) is a great program the government has in place to help first time homebuyers.  If you have never owned a home or if you have not owned a home in the past 5 years you may be eligible to withdraw up to $20,000 from your Registered Retirement Savings Plan (RRSP), to buy or build a home, without paying tax.

            How does this help you?  Well for starters if you are just beginning to save for your first home imagine how much faster you will get there if you are not paying tax on the growth.  Now add to that the tax refund and you’ve really got something happening.  Let’s look at a person who has a 31% Marginal Tax Rate, and is saving $500 a month for 2 years at an assumed interest rate of 5%.  In a normal non-registered investment they will have a down-payment of approximately $12,432.  Now using the same example, look at the down-payment if they used an RRSP and reinvested the tax refund.  They would have approximately $17,017, which could be withdrawn using the HBP and used as a down-payment.  The results will vary depending on interest rates, tax rates, and investment vehicles, as well as the amount invested.  This example is used to illustrate how an RRSP can help accelerate saving for a down-payment.

            Now what about people who have already saved their down-payment?  Well, how would you like an entertainment system or brand new appliances for your new home?  As long as the money is invested for at least 90 days it can be withdrawn tax free under the HBP.  So if you have a lump sum set aside to buy a home but don’t plan to purchase for 3 months or longer, you can take the money you have set aside for your down-payment and put it into your RRSP, assuming you have adequate RRSP room.  90 days later it can be withdrawn under the HBP and you will be eligible for a significant write off on your next year’s taxes.  Using a 31% Marginal Tax Rate again, with a $20,000 down payment you could receive up to $6,200 on your tax return which can be used towards getting those “extras” that make your new home really special.

            The HBP is only for eligible first time homebuyers with a few exceptions.  Money withdrawn under the HBP must be in an RRSP for at least 90 days and all money withdrawn from the RRSP must be reinvested over 15 years starting the second year following the withdrawal.  If you do not repay the amount due in any particular year that year’s amount must be added to your income for tax purposes.  You should sit down with an investment professional from Langlois Financial Services Inc. to discuss your individual situation to see if the HBP is right for you.