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Money Management Newsletter: General Interest
Hindsighting investments -
Income funds, GICs or both?

By the Money Management Editor
A Money Management Newsletter article

We all wish we had invested in “that sure thing”. The problem is the Sure-Thing racehorse “could” have won the Belmont stakes. Life’s like that - some you win, some come in fourth.

However, for most the sure-thing investment is fixed term deposit instruments, like guaranteed investment certificate. Financial planning experts counsel that a portion of your portfolio be investor in fixed income securities.

The reasons are simple, fixed income investments act as the cornerstone for any portfolio by adding the counter balance to market securities that are chosen for growth. Moreover, as we get older the less we are able to take risks with our capital as the reliance on monthly income plays a larger part.

*How to figure out the how much fixed income to include in a portfolio? *

An easy method is to use your own age. It works like this, if your aged 20 then have 20% in fixed income, and as your age, you would increase that percentage, so at age 80, your fixed income component would be around 80%.

With taxation and inflation taking its toll on interest producing investments, what are the alternatives? This is where hindsight comes into play. As we know, we are looking for is a steady, predictable income stream along with capital preservation.

The chart below (courtesy of CI Funds) illustrates how investors can generate income without significantly eroding capital. In this example, an investor deposited $100,000 in their Signature High Income Fund on August 31, 1999, and withdrew $10,000 a year (833.33 a month) for the next five years. Even with withdrawals, the account still would have grown to $115,241 with a net after-tax value of $97,899.

Signature High Income Fund $100,000 invested August 31, 1999

12 Month Period Ending	Annual Withdrawal (before tax)	Annual Capital Gain/Loss (before tax)	Annual ROC (before tax)	Annual Distributions Reinvested (before tax)	Annual Tax Liability*	Portfolio Value (before tax)
August 31, 1999	$ -	$ -	$ -	$ -	$ -	$100,000
December 1999	$3,333	- $136	$3,470	$2,533	$1,051	$93,937
December 2000	$10,000	- $398	$10,398	$8,126	$3,678	$98,874
December 2001	$10,000	$632	$9,368	$7,314	$3,261	$103,149
December 2002	$10,000	$965	$9,035	$7,120	$3,392	$101,495
December 2003	$10,000	$1,264	$8,736	$7,322	$3,381	$113,202
August 31, 2004 (8 Months)	$6,667	$1,369	$5,297	$4,873	$2,579	$115,241
Total	$50,000	$3,696	$46,304	$37,289	$17,342	$115,241

Signature High Income Fund vs 7.5% Fixed-Income Investment
Account Values After $10,000/year Withdrawals (before tax)
August 1999 to August 2004

Return On Investment (as at August 31, 2004)
Account Value	$115,241
Total Withdrawals	$50,000
Initial Investment	-$100,000
Total Tax Liability	-$17,342
Net Gain After Tax	$47,899

* The tax rates applied to capital gains (distributions and withdrawals) and income were 23.2% and 46.4% respectively. Assumes an initial service charge of between 0% and -3% paid by the investor to the advisor independent of the investment. Distributions reinvested monthly. Withdrawal was $833.33 / month using month-end NAV.

With all investments, risk is major factor, knowing the extent of the risks lessen their impact. GICs are considered as low or no-risk. However in the background to a fixed term GIC, is the bond market daily revaluation (bonds and GIC are similar)- if the GIC were exposed to a daily valuationary environment, as is a bond, then it would mimic mid-term highs and low pricing.

Income funds valuations will vacillate – that’s normal. But as we see in the charts above the overall funds is in a real sense is very positive. The income generated over the illustrated period shown the potential for higher income and growth in comparison to a GIC product.

To see how this type of investment suite your needs consult a fiscal Agents Investment advisor. All mutual funds are sold by prospectus only; fund valuations can change on a daily basis.

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