Retirement Planning
for the
Canadian Investor

Home Page


Client's Comments

Associated Sites


Financial Commentary

Tax Strategies

Audio Business Card




Design by
CY7 Computer Services



Affiliated with Sentinel Life & Sentinel Financial Management Corp.

March/April - 2000

Commentary - Hans H. Mathisen

    The March issue of LIFE LETTER reminds us of what we all know, but so few of us manage to put into practice: We should pay ourselves first. We all would like to be millionaires. Take a look at how much you have to save per month if you aim at being a millionaire by the time you are 65! And in your efforts to get to the $1,000,000 mark, where should you invest? Read on:

For April, LIFE LETTER highlights some of the features of Paul Martin’s latest budget. It’s the item RRSP foreign content limits increased that deserves a closer look: The foreign content allowed in your RRSPs will go up to 25% this year and to 30% in year 2001. But indications are you should invest all your money outside Canada. Read on:

    THE STOCK MARKETS — The TSE 300 has enjoyed an impressive growth for several months. But the TSE300 Index’s performance is scary because the market’s recent surge has depended mostly on the profit performance of only three companies (please see the article "Why TSE 300 needs more helping hands").

    Canada comprises less than 2% of the world’s equity markets. (Please refer to Gordon Pape’s "Commentary on Mutual Funds"). And when the growth in the 2% Canadian market happens as a result of the performance of only three companies, then aren’t those who invest in Canada putting their money into a Regional Sector Fund? Such investments are, according to Gordon Pape, the riskiest of all investments.

    In the arena of global investments, it’s depressing to be a Canadian. Writing in the Financial Post on May 22, 1999, University of British Columbia professor Paul Kedrosky cites a study which places Canada the 23rd out of (44 countries included in the survey) best place to invest. Of course, the U.S. placed first, and Hong Kong second. But Canada placed behind countries like Spain, Argentina, Ireland, and Korea. Why did Canada score so poorly? "High levels of government debt, poor GDP growth, aggressive capital gains taxes, and on an on: All these measures served to torpedo Canada’s score", comments professor Kedrosky. "It is a little like re-arranging the deck chairs on the Titanic", concludes the professor. "Scenic vistas and worry-free medical care do not a successful economy make".


Hans H. Mathisen


[Top of Page]



"Who Do You Save First"
    A fire breaks out in a movie theatre. You are there with your spouse and children, as are some local merchants. Who do you save first? The butcher? The baker? The candlestick maker? Their families? Or your family and yourself?

    A silly question. You would obviously save your loved ones and yourself first.

    But is this the only time you would put you and yours first? For example, do you save for yourself first? Or do you pay the butcher, the baker and the candlestick maker first, and save only what is left over, if anything, for yourself? At the end of each paycheque, how much have you saved for you?

    It’s so easy to put yourself last. At 18 you probably put yourself first by investing time and money in your Education. But since then how much have you invested for yourself? As we reach the different stages in our lives, taxes, mortgages, kids, automobiles, entertainment, travel, food, etc., all consume our earnings leaving little or nothing left to save. But what can one do?

    The answer is amazingly simple and is contained in a short book written years ago. The Rules of Gold told of simple steps to take to become comfortably affluent. The first? Part of all you earn is yours to keep.

   Think for a minute or so of all the raises you’ve received in your career. If you’d spent only three-quarters of each increase, would your life style have suffered? And if you’d saved just a quarter of all those raises, how much wealthier would you be today?

    Makes sense, because if you don’t put it away for yourself, no one else will. So, how long have you been earning a living? How much have you earned in that time? How much have you kept?

    Who wants to be a millionaire? Most of us would. And it’s not that difficult to accumulate given regular savings and adequate time. Save and invest just under $200 a month at an average compound rate of only 7% annually, and in 50 years you’ll have that million. The less time you have to save the more you have to put away. If you have only 40 years, then put away just over $400 monthly; 30 years, just over $850 each month; 20 years, just under $2,000 per month. So the sooner you start, the more you’ll have.

    It sure would be nice if we could win a million on a TV show or in a lottery, but that’s highly improbable. And "easy come" usually leads to "easy go". Those who build their wealth through steady accumulation usually hold on to it longer. To discuss this at greater length, please call:

Hans H. Mathisen
Mathisen Financial, Inc.
(306) 242-7042

[Top of Page]





"Income Taxes -- Good News & Bad News"
    First the bad news: it’s too late to do anything about the tax on last year’s income other than pay it in April.

    The good news is that you may be paying less in the future thanks to Paul Martin’s latest budget. Though there are many positives, critics feel it falls short in some areas. Here’s where most taxpayers come out ahead:

    Taxes to decrease by $58 billion over next five years. This is much greater than the expected $40 billion benefit and can be attributed mostly to two major measures:

        Indexation for inflation - Finally, the federal tax brackets will be fully indexed to inflation instead of just inflation over a set percentage. These brackets haven’t changed since they were introduced in the late 80’s. This has meant that we have paid taxes over the years as more and more of our increasing income was taxed at higher rates. This happened because the tax brackets weren’t          increased (called bracket creep) to reflect true inflation so more of our income fell into higher brackets each year.

        Personal tax rates decreased - Almost $40 billion is attributed to personal income tax reductions.  A further $14.8 billion comes from reduction in Employment Insurance premiums. To see how much you’ll save, visit the Internet site

    The 5% surtax is to be removed from earnings up to $85,000. Taxpayers earning over this amount will still be subject to the surtax on income over $85,000.

    Capital gains taxation reduced. The taxable amount of capital gains has been reduced to 66.6% from 75%. This should have a positive impact on the economy as a whole as investors retain more of their stock market, real estate, business, and other capital gains.

    RRSP foreign content limits increased. You’ll be able to increase the foreign content held in your RRSP plans to 25% in 2000 and up to 30% in 2001 . This may be a moot point as many Canadians have been increasing their foreign content using "clone" funds over the past few years.

    The basic personal exemption has been increased from $6,794 to $8,200. This means that you pay tax on less of your income next year. This also enlarges the advantages of income splitting to further reduce your annual penance to Ottawa.

To meet and discuss your tax reduction possibilities, call:

Hans Mathisen
Mathisen Financial, Inc.
(306) 242-7042

Copyright 1999 Bowen Financial Inc. and Donald F. Pooley, Inc. All rights reserved. Illegal to copy without written permission.          

[Top of Page]






Why TSE 300 needs more helping hands

Market's recent surge has depended largely on the profit performance of just three companies: BCE, Nortel and JDS Uniphase

An article by Carlyle Dunbar
    OK, so profits -- or the expectation of profits -- drive the stock market. We know that in Canada, corporate profit growth has been as skittish as a drop of mercury. What with a resource recession in the 1990s, the industrial world's highest tax burden and governments that think a handout is "job creation," things have been tough.

    Small wonder the Canadian stock market dragged through much of the 1990s like a hunter lost in muskeg.

    Lately, of course, the market has looped higher. But this is largely on the success of Nortel Networks Corp. and its parent BCE Inc., and fibre-optic specialist JDS Uniphase. Leave out those three and the 2000 Canadian market resembles the 1990s all too closely. If the market's advance is to continue and broaden, we need profits --- more of them from more companies. To be specific, it needs profits as shown by the results of the companies whose stocks comprise the Toronto Stock Exchange 300 composite index.

    Whether earnings will get better than they are is the key question, one that current market action is enigmatic in forecasting.

    The key point to remember is that stock prices anticipate changes in earnings. That's why earnings are usually peaking after stock prices are falling from a high, and why bull markets start when profits are still dropping.

    The Canadian market's 77% rise from October 1998 to the February record high implies a continuing surge in profits. But because the market's recent rise has depended on so few stocks, that implication could be misleading.

    You see that narrowness in the comparable rise by the unweighted TSE composite index, produced by The Financial Post to show how the 300 stocks perform when each counts the same in weighting. This eliminates the Nortel-BCE-JDS gorilla factor. The unweighted 300 index gained only 41% from the 1998 low to the recent high. And the unweighted index remains a good distance below its record, reached in 1997. By some measures of comparison, the current earnings rise could strengthen and endure. By other indications, the main part of the cyclical profit gain appears to have almost run out.

    Corporate profits move in big cycles. That's no surprise, because just about any activity is cyclical. Corporate profits as reported by TSE index companies, reached a record high in 1995 of $346 adjusted to the index (data for the trailing 12 months).

    In the era covered by the TSE composite index's history, peaks in earnings have occurred every five to 12 years. Previous cyclical peaks were in 1989, 1980, 1974, 1969 and 1957. Normally, profits grow and diminish in a fairly smooth line. Not so for the past decade.

    Earnings adjusted to the TSE index have jittered about, each upturn failing to match the preceding earnings high. That is not an encouraging model. The final low in the earnings drop appears to have been in August, at $200. But we can't yet be sure that total will hold as an historical cyclical low.

    Earnings reported by companies making up the TSE 300 often peak when they rise about 20% over six months. As of January, earnings adjusted to the TSE index were $249, up 19% from six months before. During February, the total climbed to $275, up 34% from six months before.

    There have been key exceptions to the observation that six-month earnings gains often peak at around 20%.

    In 1984, coming out of the 1981-82 recession, earnings jumped about 40% in six months. They were up 30% in 1988.

    In the 1960s, profit growth was steady -- there wee few months when earnings failed to gain over six months, but the top gains were less than 20%.

    Earnings changes going into and out of the 1992-94 period are off the map, because Canadian industrial earnings tanked (the resource recession) and profits almost disappeared from the TSE index.

    So, without breaking any profit records, the rate of gain in earnings is already pushing the limits.

    From this we can view the current situation as already better than normal, or as normal as it gets. We are not recovering from a certified recession, nor have we had a period of sustained profit growth. But we are coming out of a fairly deep trough in the earnings cycle. At a cyclical low in August, TSE earnings were down 25% in six months. The six-month measurement reacts faster than, say, year-to-year TSE earnings.

    Gains in earnings through 2000 could follow the common pattern, with the suggestion that the profit rise is close to its crest. The market is going to reflect closely changes in perception about the ability of Canadian companies to boost earnings further.

    If the market becomes at all doubtful about the ability of corporate Canada to make bigger profit gains this year, that doubt will quickly show up in weak stock prices.

[Top of Page]


Commentary on MUTUAL FUNDS
Gordon Pape

Gordon Pape, the well known Canadian author, broadcaster, and financial consultant, made the following comments on MUTUAL FUNDS on CBC Radio on March 16, 1994:
    "One of the main benefits of equity mutual funds is that they spread assets over a well-diversified stock portfolio. But they can also be risky."

Two ways to look at Equity Fund Risk:

- The Simple Rule is: The broader the base of the fund, the less the risk.

- The most broadly-based type of fund is the international stock fund. Fund Managers can buy and sell around the world, going where the action is, and avoiding areas of potential trouble.

- Next up the risk scale are area funds: e.i.: Pacific Rim.

- More risky: single country funds, such as Japan. These funds are higher risk because, if the stock market in that country falls, the value of the mutual fund will decline as well.

- Still Riskier: Emerging market funds which invest in third world countries such as Mexico, Thailand, Turkey, etc. They offer good profit potential, but their markets are often volatile, so the risk is high.

- Top of the Geographical Risk Scale: Regional funds such as funds which invest only in Alberta. If the economy of the region is hit - say, by a fall in the price of oil in Alberta's case - the fund is going to suffer.

- Dividend Income Funds rank lowest on the risk scale. They invest mainly in preferred shares and high quality common stocks. The main goals are a combination of safety and dividends. That makes Dividend Income Funds especially good for conservative investors who want to make use of the Dividend Tax Credit.

- Next up the scale: Blue Chip or Large Cap Funds. These funds Invest in shares of large corporations. If the stock market falls, they'll obviously get hit, but often not to the same extent as higher risk funds, such as those funds that invest in small to medium sized companies.

- Small Cap Funds invest in small and medium sized companies. These funds are higher on the risk scale. Small Cap Funds are very common in the U.S. When they're in favor, as they are now, these funds can do very well. Several of them gained 40 % last year. But in bad years, they can lose almost as much.

- Sector Funds are highest on the risk scale. These invest in one area of the economy: Resource Funds are most common in Canada. Some of these funds were up more than 70 % last year, but you may have to endure years of low returns, or even losses, to get one spectacular year of returns".

CANADA .............................................................................2.00%                                           
The U. S., Japan & Hong Kong ............................................75.00%             
The Rest of the World, including Europe ..............................23.00%

REMEMBER: Gordon Pape's Simple Rule: The broader the base of the Fund, the less the risk.

If you are invested in the 2% of the World's Equity Markets called Canada, where are you on Gordon Pape's Risk Scale, and what is the Growth Potential of your investments (NOTE: on a global scale, if you are invested in Canadian Mutual Funds, haven't you invested in a Regional, Small Cap FUND?)

   Wouldn't it be preferable to invest in 75% of the World's Equity Markets, with 75% of your investment being guaranteed? By doing that, you would enjoy Gordon Pape's lowest level on the risk scale, and enhance your investment return in the process.

    Your investment in 75% of the World's Equity Markets can be 100% RRSP eligible, and does not encroach on the 18% foreign content rule.

    For additional information, and a no-cost, no-obligation consultation, contact Hans Mathisen .
    Phone (306) 242-7042.
    Fax: (306) 242-4314.
    P.S.: You'll be glad that you did. After all, it's your hard-earned money that's involved.

[Top of Page]

[Home Page] [Services] [Financial Commentary] [Tax Strategies]
[Associated Sites] [F.Y.I.] [Client's Comments] [Biography] [More Info]

Mutual confidence is the power that binds together all harmonious human relationships.

Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314