New Year’s resolutions should include finances

(December 31, 2004) Among your clients’ New Year’s resolutions, there is sure to be some reference to getting their financial acts together. While having a financial advisor in the first place already puts them ahead of the curve, there’s always room for improvement.

A good start might be paying down debt. As the credit card bills start rolling in, your clients may want to consider paying off their high-interest cards with lower-interest lines of credit.

Scotiabank recommends consumers hold at least three months worth of living expenses in savings, in case of unforeseen difficulties. According to the bank, about 75% of Canadians do not have an emergency fund. If clients haven’t already done so, arranging an automatic savings plan will make it easier to build up this reserve, since a small bite from their paycheque should not dramatically affect their lifestyle.

For the same reason, automatic contributions to an RRSP are another good idea, one most advisors will have already recommended to their clients. If clients have resisted year-round contributions in the past, now might be the time to try to persuade them again. It will be easier to max out their RRSP limit through small payments over the course of the year.

And if contributions are made through payroll deductions, the client can avoid paying excess income tax on the contributions.

Clients with children can use automatic payments to fund an RESP as well, further reducing their tax exposure. If they haven’t already started a plan, now is a good time to remind them of the government grants they are missing out on.

The feeling of getting a fresh start that comes with the New Year makes it an excellent time to have clients in for a portfolio review. The stock market had another good year in 2004 and chances are portfolios have become a little unbalanced.

Edward Jones’ chief market strategist Alan Skrainka agrees that rebalancing is important, but warns against radically altering the asset mix based on the latest trends.

“Making a long-term investment decision in reaction to short-term events is almost always a mistake,” he says.

He stresses that changes should be made only if the long-term outlook for an investment has changed, an investment no longer meets a client’s long-term goals or if his or her portfolio needs to be rebalanced.

While it may be time to take some stock profits off the table, Skrainka recommends a “healthy” weighting in equities.

“Great stock market performance usually occurs when it’s least expected — like the Dow’s 25% rise in 2003,” he says. “Stocks are an important part of a well-diversified portfolio and will likely outperform bonds and cash over the long term.”

He recommends higher quality dividend-paying stocks, since they have historically offered superior returns as compared to companies that did not pay a dividend. Reinvested dividends will also compound the investment’s returns.

“For most people, a large portion of their investment portfolio should be in growth-and-income investments,” notes Skrainka. “These have provided returns similar to that of growth and aggressive-growth investments over the past 10 years, with less volatility. That said, all investors should own investments from several different asset classes.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com