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  • Protecting your portfolio against currency changes

    In our conversations with clients, one question keeps coming up these days:

    “The Canadian dollar has dropped a lot. How is this impacting my investments?”

    You may have wondered this yourself so we thought to address it here. To clarify, when the Canadian dollar falls, as it has by 7% against the U.S. dollar in 2015, the value of U.S. holdings in a portfolio rises. The reverse is also true. For example, from 2002 to 2007, when the Canadian dollar climbed from about $0.63 to over $1.02, the S&P 500 returned over 6% annually in U.S. dollars, but lost about 2% a year in Canadian-dollar terms. Many investors have seen otherwise solid returns wiped out by currency fluctuations.

    Predicting currency patterns is one of the most challenging tasks in the field of investing. Today, more than ever. And while we are the first to remind clients that we are not currency traders, you can’t ignore exchange rates when investing internationally. There are two ways to look at the issue:  first as owners of U.S. assets and second as potential buyers.

    Those who have been following our strategy know that since 2010 we’ve been putting a lot of money to work in the U.S., predominantly in the stock market and private real estate (e.g. apartment buildings). For much of this time, the Canadian dollar was close to par and the beat-up U.S. market was giving us an opportunity to buy quality assets at reduced prices. This strategy played out nicely given both the loonie’s decline and the uptick in the U.S. economy over the past four years.

    The challenge before us now is to protect these gains should the Canadian dollar recover. Because while it may fall further in the short-term, it is unlikely to stay at current levels over the medium to long term.

    The second issue is with respect to potential new investments in the U.S. In front of our investment committee currently are several U.S.-based real estate investments that look attractive. Yet, if we are buying U.S. assets with 80 cent dollars and the dollar rebounds to, say, 90 cents, we need to be comfortable that our target return is still attractive. This is a regular point of analysis and discussion at our investment committee meetings.

    There are a number of factors that impact exchange rates and we believe it is best for us to avoid predictions. From our perspective, the answer is to put a hedge on a portion of our U.S. dollar-denominated holdings. (To hedge is to enter into a financial contract to protect against unexpected, expected or anticipated changes in exchange rates.) We recently hedged one third of our U.S. exposure and will continue to manage this risk going forward to protect client returns and capital.

    Currency hedging is not a panacea – there is a cost, it is imprecise and it only protects the value within a certain range and for a certain period of time under the contract. And there’s the possibility the Canadian dollar could go lower still. (The pundits’ forecasts range from 70 to 90 cents over the next year.) However, in this volatile, low-interest rate investment climate, where every percentage of return is hard won, we think it makes sense to lock in some of our gains. It’s all part of our approach to protecting capital first — especially when we can buy that protection at a cost that is reasonable – and above all, to be prudently diversified.

    Retirement Planning for the High-Net-Worth Investor

    Retirement White PaperIf there is one question that is common to almost all Newport Private Wealth clients it is this: “How much money do I need to retire without any worries I’ll outlive my capital?”

    Because so much of the work we do is in helping people answer that question and design a retirement lifestyle that aligns with their vision and their means, we decided to tackle the issue in this newly-released whitepaper, Retirement: How much money do you really need?

    We have drawn on the perspectives of our wealth management professionals who have been providing retirement planning advice to clients for decades and the input of affluent retirees who offered their views on what makes for a happy, secure retirement.

    If you are a high-net-worth individual near or in retirement and would like to know more, feel free to get in touch or sign up for our Retirement Crash Test.

    How to be better organized financially in 2015

    A new year always represents an opportunity to do things differently. Some people set specific goals with action plans, others have a general sense of what they want to improve and act on it. According to a recent study by U.S.-based Fidelity Investments, 51% of people who made financial resolutions last year reported feeling better about their finances today — compared to just 38% who said the same but did not set goals.

    In the spirit of the season, we offer this month-by-month guide to help you better organize and optimize your financial affairs. Even if you’re already in good shape, you might find something on the list that could help you improve your overall financial picture — and your peace of mind.

    January

    • Reflect back on 2014:
      • Review prior year’s investment portfolio and discuss with your advisor your strategy for the upcoming year.
      • If any significant changes or life events occurred; births or deaths, buying or selling of material assets, make sure to revise your Will and Power of Attorney(s) to reflect current wishes.
    • Review balance sheet for all family entities (i.e. trusts, corporations, family members).
      • Effectively redeploy cash balances to reduce debt or to obtain higher returns.
      • Minimize non tax-deductible debt and consolidate where appropriate.
      • Assess short term liquidity needs; set aside emergency funds covering a minimum of 3 months of living expenses.
      • Pay interest on prescribed rate loan by January 30th. If you don’t have a prescribed rate loan, consider it; as rates are at their lowest levels 1% from January 1st – March 31st.
      • Revise pre-authorized corporate tax remittance.
      • Establish priorities for charitable giving. Revise pre-authorization of payments for changes in giving.

    February

    • Take advantage of tax sheltered compound growth.
      • RRSP contribution deadline for 2014 is March 2nd 2015; maximum contribution limit for 2014 is $24,270.
      • TFSA contribution room is $5,500 for 2015. Top up unused contribution room accumulated since 2009 and re-contribute any withdrawals from previous years.
      • Consider spousal RRSP or RRSPs/TFSAs for kids over the age of 18.
      • Review past unused contribution room in RESPs and take action. Only one year’s contribution can be carried forward in a given year to receive government grants.
    • Collect receipts and other information for tax filings due in March (trusts) and April (personal).
    • Consider paying out a taxable/capital dividend to preserve your operating company’s qualifying small business corporation status.

    March

    • First installment due on March 15th for taxpayers remitting quarterly.
    • File trust tax and information returns by March 30th.

    April

    • File personal tax returns for all family members by April 30th.
    • Pay any outstanding tax liabilities by April 30th (April 15th for U.S. filings).
    • Revise personal tax installments for the balance of the year.
    • Review Q1 investment portfolio results.

    May

    • Review life and disability insurance needs and coverage.
    • Discuss income/family expectations for university/college children returning home to set expectations for the summer and September enrollment.
    • Review your notice of assessment and take appropriate action.

    June

    • Second quarter installment due on June 15th for taxpayers remitting quarterly.
    • File personal tax return by June 15th if self-employed.
    • Pay out any prior year accrued bonus by June 30th for companies with a calendar year end.
    • Consider sprinkling the capital gains exemption on shares in your business to other family members.

    July/August

    • Review Q2 investment portfolio results.
    • Consider mid-year reflection on personal, business, family and financial goals, philanthropic/stewardship objectives etc. and develop action plan for implementation in Q3 and Q4.
    • Determine most effective tuition funding strategy for upcoming school year. Also, review student living accommodation and opportunities to buy vs. rent.
    • Encourage and support your children in establishing their own savings and investment plans.

    September

    • Third quarter installment due on September 15th for taxpayers remitting quarterly.
    • Review shareholder’s agreement.
    • Consider the merits of incorporating and/or an estate freeze.
    • Consider transferring property to other family members to minimize current and future tax liability. If you have a child turning 18, there are additional opportunities.

    October

    • Review Q3 investment portfolio results.
    • Review medical expenses for the past 12 months (including those of dependent parents) to determine if there are tax deduction benefits.

    November

    • Begin year-end tax planning:
      • Review status of unrealized capital gains and losses on investment portfolio and take appropriate action to minimize taxes for the current and prior years.
      • Consider a private or community foundation to shelter large capital gains.
      • Consider flow-through shares or other tax sheltering opportunities.
    • Ensure at least minimum RRIF and IPP withdrawals are made prior to year end.

    December

    • Last installment due on December 15th for taxpayers remitting quarterly.
    • Make all charitable donations, TFSA and RESP contributions by December 31st.
    • Ensure IPP contributions are made by December 31st or fiscal year end.
    • Determine bonus/dividend policy for your company.
    • Ensure amounts paid or payable from trusts to beneficiaries are properly documented.
    • Income splitting: ensure family members are paid for work done during year.
    • Any loans from the company to shareholders should be eliminated prior to year-end; otherwise shareholders will be deemed to receive a benefit equal to the value of the loan.
    • Final review of tax loss selling opportunities. Remember carryback of losses to shelter gains from prior years.

    Milestone Birthdays

    • OAS and CPP benefits typically begin at age 65. At age 60, consider receiving CPP benefits early or alternatively, delay OAS and CPP in exchange for the higher monthly amounts.
      • Benefits do not begin automatically; you must apply to receive benefits.
    • December 31st of the year you turn 71 is the last day you can contribute to your own RRSP. Prior to year end contact your plan administrator to transition your RRSP to a RRIF account.
    • If over 40, consider setting up an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA).

    Millennials and money: are they ready for the responsibility of wealth?

    A freak mid-November snow storm didn’t stop some twenty-five young adults from participating in Newport Private Wealth’s popular educational and networking forum, NextWave. The evening’s discussion was led by three of our young associates, providing both professional insight and their own personal experiences on the thought-provoking topic of managing finances with a significant other.
    [read more >>]

    Manage RRIF rules carefully – or you could run out of money

    Planning for retirement can be challenging. Attempting to balance your need for current income against the risk of outliving your savings is hard enough and, as it turns out, the federal government is not making things any easier.

    Back in 1992, the federal government was running a significant deficit and needed cash. To help rectify this problem, the Income Tax Act mandated that at age 71, Canadians must convert their registered retirement savings accounts into Registered Retirement Income Funds (RRIFs). Seniors had to begin drawing a minimum amount out of their RRIF every year, which was taxed upon receipt. This measure was implemented to help the federal government manage their cash levels and remove the deficit.
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    How to protect your investments from a market downturn

    At our investment meeting this week, one of my colleagues shared the news that he had received a call late the night before from a prospective client confirming his decision to hire us to manage his portfolio. While that itself is not news we’re thankful to say, what was interesting was the voice mail message the investor left, saying, “The market seems a bit high so I’m moving my money over to you guys to put to work in your more diversified platform.”

    Although we may be biased, we think there is merit in what he says — and we applaud his foresight. Too many investors (even professional ones!) have a tendency to extrapolate current investment trends well into the future. That is, they buy in after markets have been performing well only to sell out of fear when they turn bearish. In other words, they buy high and sell low. Frequently-cited research by DALBAR shows that over the past decade, investors have cost themselves potentially 4% per year in returns by doing the wrong thing at the wrong time.  In this business, one must be vigilant about not letting emotion drive decision making.
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    How to talk to aging parents about their financial affairs

    There comes a point when adult children should be asking certain questions of their parents to ensure that their financial affairs are in order. As parents age, achieving financial independence for retirement is a primary objective and effective planning should start well ahead of time. Similarly, planning for the smooth succession of assets on death is critical to maintaining family harmony through a difficult time. Here is a list of questions adult children should be asking their parents, now, to better plan for retirement and beyond.
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