Most successful investment strategies hinge on holding investment funds. There are ten important wealth management tactics that can help maximize your long-term investment returns. These tactics in particular, have stood the test of time for investors interested in building a powerful investment portfolio.
Here is a list of ten investment tactics to help you achieve financial independence.
1. Deduct interest. If you plan to borrow money to finance your expenses, consider arranging your financial affairs so you can borrow to purchase investments. Interest on this type of borrowing remains fully tax deductible for as long as you continue to hold income-generating investments (outside of an RRSP).
2. Consider income splitting. Income splitting is the idea of moving income to family members who are in a lower tax bracket than you. To split family income with your spouse you can invest the lower-earning spouse's income, while the higher earner pays family living expenses and taxes. You may also want to contribute to a spousal RRSP. If you own a business, where applicable, pay your spouse a salary for work performed on behalf of your business. To split income with children, you can give them cash, or any other assets (if they are over 18). For children under 18, consult with your financial planner to learn more about attribution rules.
3. Structure your investments for tax. To avoid paying high taxes on income from earnings or interest, structure your investments to earn primarily capital gains outside your registered accounts.
4. Defer tax. If you are investing in non-registered holdings, but have not maximized your RRSP, you may be losing the opportunity to deduct up-to-the-maximum contributions from income. You also miss out on the pre-retirement tax deferral, during all the time that elapses until you retire. You could be deferring these tax liabilities on investment income, until you withdraw the funds held within your RRSP, or your RRIF.
5. Create trusts. Trusts are ideal if you hope to transfer income, and/or capital gains to a beneficiary. If you own a business, you can even use trusts to pass the business on to your children for tax purposes while still retaining some control. Make sure you obtain expert advice.
6. Donate. Charitable donations are effective wealth management tools because they provide you with a tax break while allowing you to make a real difference for a cause important to you.
7. Develop a plan. As with all things in life, good intentions are seldom enough. A professional investment plan can ensure you reach your financial goals, while not depending on Canada Pension Plan (CPP). Begin to envision independent financial success.
8. Start early as time adds value to money. Habitually pay yourself first every pay-cheque, before you pay your bills. Due to inflation (now running at 2.8% over 12 months), you may need well over $1.5 million to retire 30 years from now. At 10%, $9,000 invested annually over 30 years will amount to $1.5 million. If you delay investing for just 10 years, you would need to invest $26,000 annually over the remaining 20 years to achieve the same result. Wait another 10 years and you will need to invest approximate $90,000 per year over 10 short remaining years, in order to achieve the $1.5 million total. Time will work against you if you procrastinate.
Source: Statistics Canada: On a 12-month basis, the All-items CPI rose by 2.8% in January, up from the 2.2% rise in December.
The Rule of 72: divide your annual percentage rate of return (yield) into 72. The answer will tell you how many years are necessary to double your money.
9. Maximize your RRSP contribution. As long as one earns an income (or where an individual has unused contribution room), an RRSP contribution creates the biggest tax break available to most Canadians. Canada Revenue Agency (CRA) allows you to contribute up to 18% of your previous year's earned income up to a maximum threshold, minus pension adjustments reported by employers.
Note: The tax savings are calculated at a compound annual rate of 10%, without income tax deducted. Taxation is deferred until income is withdrawn from a registered investment. Conservative calculations can also be run at 5% which may be safer, given the recent market decline.
10. Invest with a global perspective. Different economies worldwide can experience market gains at differing times or at the same time depending where each economy is in its own distinct market cycle. Markets such as Canada and the USA influence one another closely in their market cycles. Canada's stock market capitalization is less than 3% of the total of the entire world. Therefore, it makes sense to invest in foreign funds investing in foreign securities. This can be accomplished by purchasing Canadian-managed foreign mutual funds that invest in foreign equities—and your RRSP can hold up to 100% foreign content.