EXPERTAdvice Freedom 55: Reality or Fiction?
Penny Sandercock National Bank Financial 89 Broadway Street Yorkton 306.782.6456 penny.sandercock@nbf.ca kris.sapara@nbf.ca
Second, time provides the magic of compound interest. This means the interest you earn gets added to your original investment in order to then earn interest on itself. The earlier you get started investing, the more your interest will have time to compound. Time also allows for dividends to compound as well. Dividend reinvestment plans allow for the dividends you earn to automatically buy more shares in the company. Your investments can practically grow themselves.
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Most people are so happy to achieve investment growth or gains that they dismiss the little matter of how much tax they will be charged. Yet tax is the biggest bill you will ever pay, whether it’s on your investments, your income or eventually, your estate.
Time is important in three ways. First, take a long view. Select a company you believe will do well over time, buy and hold. As Warren Buffett likes to say, “the best time to sell a stock…is never.” Leave the market timing and constant buying and selling to the speculators and the day-traders. The exception is when it comes to keeping your portfolio balanced.
When you sell an investment outside an RRSP or a TFSA, the money you end up with is taxable. The amount of tax depends on what the investment has done—has it grown in capital gains, issued dividends or generated interest? Each of these will have an impact on your annual tax return. Taxes can also erode your retirement nest egg. When you reach retirement and begin withdrawing money as income, your advisor can help you to create an income withdrawal strategy that is tax-efficient, reducing taxes.
uccessful investing does not need to be obsessive stock selections; what’s going up, when to sell. In fact, building wealth has little to do with selecting the right stock and everything to do with time, tax efficiency and balance.
Balance can be even more important than choosing the right stocks; attaining the correct weighting in bonds with the remainder in equities and a small portion in cash. Over time, you will likely move from being an aggressive investor focused on growth and building wealth to being more conservative with a greater interest in preserving the capital. Annual reviews are important to make sure investments that have grown in value are not now dominating your portfolio. You want to maintain the overall asset allocation by selling off shares in securities that have grown and investing the profits into the area where your asset allocation needs a boost. This is called portfolio rebalancing and by doing this, you will always “sell high” and “buy low,” one of the most important factors in building wealth. So forget about all those complicated financial tables and the hot stock tips. Pay attention to these three factors— time, tax-efficiency and portfolio balance—and you will have an awesome head start in terms of retiring and getting your money to work for you. Your financial advisor can guide you through this process. FLP
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