You and your physician colleagues
are notoriously bad at making sound investment decisions,
particularly when it comes to the stock market. It need
not be so. All you need to become a successful investor
is to remember a few things that you already know and
pick up a few facts that you've possibly overlooked, given
that most of your attention is focused where it should
be, on your patients.
The facts you need to know to be
a stock-market winner:
• Over time you can
count on the stock market to deliver better returns
than virtually anything else. Need convincing? In 1984,
20 years ago, the Dow Jones index was around 1200. Today,
despite 9/11, the Iraq war and everything else that's
happened since, it's around 10,000. During the Second
World War it was around 100!
• The biggest and best-known
companies keep pace with the stock indices � whether
it's the Dow or the TSE.
• You need to be diversified
� that is, to invest in leading companies in several
different industries.
• Invest for the long
term, at least five years, but the longer the better.
• You don't need a
mutual fund � with their heavy fees � to do your investing
for you as long as you plan a diverse portfolio of the
biggest and best companies and let the money sit.
• You need to understand
how RRSPs work and use them to your advantage.
RRSPs:
SMOKE AND MIRRORS
The one thing you must never forget about RRSPs is that
they are not tax-saving plans, they're tax- deferral
plans. You don't pay tax on the money you put in � or
on the income it earns � but you're fully taxed on what
you take out. If you're in the 50% tax bracket now,
you'll very likely be taxed at that rate or more when
you withdraw money from your plan.
Invest in RRSPs until you're into
your best earning years. For most doctors that's between
ages 45 and 55. By then you should have some idea of
when you plan to retire and how much capital you think
you'll need. Once you know that, begin talks with your
financial advisor about an exit strategy. The idea is
to minimize the taxes on your withdrawals and there
are ways to do it. (See "Cut the tax on your RRSP withdrawals"
in the next issue, coming September 30, 2004)
Know the RRSP rules: You can invest
up to $15,500 in your RRSPs this year and that goes
up to $16,500 next year. You're allowed to invest up
to 30% in foreign companies. If you don't contribute
the maximum in a given year, you can contribute more
in subsequent years. Your maximum allowable contribution
is shown on your federal Notice of Assessment.
WHY
SELF-DIRECTED?
If you never want to even think of your investments,
then choose a well-established, conservative mutual
fund company in a plan that invests only in the biggest
and the best. Understand the fees and keep track of
management changes. Keep an eye out for investment cowboys.
Put the money in every year and let it ride.
Consider a self-directed plan.
At the outset, pick 10 or 20 top long-established large
companies (70% Canadian, 30% based in the US, Europe
or Asia) and stick with them. Generally speaking, buy
but don't sell. In 10, 15 and 20 years, don't be surprised
to find that you've done very well indeed.
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