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May/June 2004

Commentary - Hans H. Mathisen

Can you benefit from borrowing to invest? - YES, you can, as LIFE LETTER for May explains. Mathisen Financial, Inc. has many clients who have benefited greatly from using this approach to investing. We call it "Using Other People's Money". The key to success when using this method is conservatism and diversification. Please call me for details.

How's your net worth? - LIFE LETTER for June gives us food for thought. You may be able to use this information when reviewing your financial plan.

THE STOCK MARKETS - For the first 5 months of 2004, the S & P TSX Composite index has returned 2.39%. The Dow Jones Index has yielded -2.54%; the S & P 500 Index is down by -0.78%; and the NASDAQ return is -0.83%. The European and Asian major indexes are all in the single digit negative through May 31, 2004.

WALTON INTERNATIONAL - Clients of Mathisen Financial, Inc. now have access to investments in residential real estate within the city limits of Calgary and Edmonton. Imagine: If you and I had invested $10,000.00 with Walton 22 years ago when this company started, and participated in the 18.00% average annual growth, our investment would now be worth $381,420.00. And how about investing in Walton's mortgages and get paid 10.92%? (I bet very few, if any, of your investments have averaged an annual return of 10.92% over the past several years).You can hold this mortgage investment inside your RRSP. For additional information, please call my office.

Here's the update on the two personal portfolios I've been telling you about. Both portfolios are conservative and diversified:
PORTFOLIO #1: March 7, 2003 to May 31,2004: The return is 22.1%
PORTFOLIO #2: April 28,2003 to May 31, 2004: The return is 26.3%
If you want to know more about this investment strategy, please call me.

HAPPY INVESTING!
Sincerely,
Hans Mathisen



 

 

 

LIFE LETTER

Can You Benefit From Borrowing to Invest?

Gerry makes regular RRSP deposits and has been using up all his contribution room for several years. He also makes regular deposits to a non-RRSP account to build up his retirement savings. He is wondering if there is a better way to build his wealth.

Investments can be made with cash or a combination of cash and borrowed money. If only cash is used, the gain or loss on the investment is equal to the percentage increase or decrease in value over time. When money is borrowed to invest, the gain or loss on the cash invested is magnified. This effect is called leveraging.

Let's say that Gerry has $25,000 of his own money to invest and he borrows $75,000 so that he has a total of $100,000 invested. If the value of his investments drops by $10,000 after one year, his return on equity (his original $25,000) is a loss of 40%. However, if his investments increase by $10,000, his return on equity is a gain of 40%.

It is important for Gerry to be aware of the terms of his investment loan. Some lenders may require additional funds invested, more collateral or investments sold in the event of a drop in value to keep the loan within a certain percentage relationship. This is called a margin call.

Gerry must be able to meet the ongoing costs of the loan. He may arrange to pay interest only for a certain number of years and sell his investments to pay the loan, or principal and interest over a certain period so that the loan is fully paid off at the end.

Canada Customs and Revenue Agency (CCRA), as an administrative measure, currently allows the deduction of interest expenses incurred to invest in equity investment funds or growth shares. These types of investments generate capital gains returns over time and are best suited for this type of strategy. Capital gains receive preferential tax treatment as only half of the gains are taxable.

Leveraging to invest is not a good strategy to use for the short-term. The risk of this strategy is greatly reduced if it is done over at least 8 to 10 years or more. Very few Canadian equity investment funds have lost money over the last ten year period.

When using leveraging as a wealth building strategy, it is wise to use conservative investments and to be diversified. After watching his friends get very high returns on high-tech stocks, Carl decided to borrow and invest as well. Unfortunately, his investments promptly lost over 40% in one year, which magnified his losses because of the leveraging.

Let's say that Gerry can afford an outlay of $3,000 per year. Ignoring taxes along the way, he could accumulate about $42,441 in 10 years at 7.50% compounded annually. The same $3,000 per year can support an interest only loan of $50,000 at 6.00. If the $50,000 is invested for 10 years at 7.50, it will accumulate to about $103,052 and then he pays off the loan from the investment. He is left with about $60,611, some $18,170 more than making annual deposits. Gerry can also save about $1,200 per year (40% tax bracket) by deducting loan interest.

Want to know more about borrowing to invest?


Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright 2004 Bowen Financial Inc. All rights reserved

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LIFE LETTER

How's Your Net Worth?

His banker asked Trent what his net worth was for a loan he was applying for. He had trouble answering the question right away.

What is Net Worth?

Quite simply, net worth is the difference between what you own and what you owe. But true net worth may not be quite that simple.

Some things that we own contribute to our total net worth but are actually a drain on our financial net worth. A motor vehicle, for example, rarely increases in value. In fact, as soon as you drive a new car off the lot, its value drops, or depreciates, by about 10% to 15%. The same holds true for a new computer, travel trailer or home entertainment system.

For an item to truly contribute to our net worth, it should at least hold its value or, more importantly, increase in value over time. Your home, RRSP investments, shares in a business and permanent life insurance policies are just a few examples of things you can own that generally meet this criteria.

Is Net Worth Important?

We all use methods of measurement to see how we are doing at something. Just as you would keep score in a hockey game, net worth is a method used to determine your financial score.

Let's say you have a goal in mind of retiring at a certain age. You need to determine what assets you have that will contribute to that goal and how they are accumulating. By measuring your financial net worth regularly, you will know how your plans are progressing and where, changes need to be made.

How Can You Increase Your Net Worth?

Trent learned that there are only two ways he can increase his net worth - increasing his assets and reducing his debt.

The easiest way to increase your net worth is to simply increase your assets. One of the best ways to do this is by starting a "forced" savings plan. Trent decided to make regular monthly contributions to his RRSP by having a set amount withdrawn from his bank account each month and increasing it yearly.

Too much personal debt is the most serious obstacle to achieving financial goals. Even modest levels of personal debt can put a drain on cash flow, leaving little to invest. Putting a 52-inch big screen TV on your credit card is not a good way to increase your net worth.

However, debt to buy some assets can have a positive effect on net worth. Some examples are a mortgage to buy real estate, an RRSP loan or a loan for equity investment funds.

Trent now realizes that he needs to review and measure his financial plans on a regular basis. By calculating his net worth each year, he can make sure his plans keep moving in the right direction.

Want help calculating your Net Worth?

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright 2004 Bowen Financial Inc. All rights reserved

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Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email:
hans@mathisen.ca