High Income Allows brace to Benefit...

High Income Allows brace to Benefit From Growth Stocks

Investor Profile Mr and Mr "R"

I am a 65 year-old retired civil servant. My wife, 63 is also retired. We allow our own home and have no mortgage or trespass Our children are grown and doing well. My pension brings in $44000 for year and my wife receives $1500 from her pension.

Mr and Mr R have built up a substantial nest provoke valued at nearly one million dollars. Their common annual income comfortably covers their splendor of living. In a small in number years, when their RRSPs will be transposeed to RRIFs, these will probably pay public another $40,000 to raise their annual pre-tax income (including dividends) to about $100000

THE "FAMILY" PORTFOLIO

Because of the indexed pension and the coming pay out from their RRIF, it would be preferable for the taxable "family" portfolio to focus forward long-term growth, rather than short-term income. This view has the following benefits: *it will save the real value of the portfolio against erosion from inflation athwart the longer term; *it will form income taxes since only 75% of capital gains are bring under rule to tax; *it will postpone some taxes because capital gains are solitary taxed after they are realized; *it will enable the man and wife to enjoy extra comforts as they memorize older; and, *it may give them the satisfaction of leaving a substantial estate to family or charity.

With this in mind, the general portfolio seems to be too heavily weighted in durances and preferred shares. These could be reduc in order to increase equity holdings.

These transactions should be used to improve portfolio diversification and to create more even-sized holdings-each at between 3-5% of the total portfolio. Mr and Mr R might also consider the elimination of their higher risk stocks which are far below expense This would realize some capital losse and restore this year's tax bill.

Stocks to studious mood

With a focus onward long-term growth, about 50% of the portfolio should be made up of shooting stocks, including some deep discount clos region funds. Another suggestion would be to include brace gold stocks, partly as a hedge against futurity inflation. Prime Resources, Cambior, and Ashanti Goldfields are possible candidates.

Since the American economy has already experienced an unusually lengthy growth cycle, only a small frontage to cyclical companies would be advisable (about 15% of the total portfolio). Alternatively, cyclicals could be left public all together in favour of more vegetation stocks.

The remaining 35% of the portfolio would continue to shut up income oriented securities such as high yield usuals and preferreds, as well as a long life Royalty Trusts. each managed portfolio benefits from holding about reserves in the money market. These can appease the impact of a possible stock market decline and also provide the necessary wealth to buy bargains as they arise.

THE RRSP PORTFOLIO

In in the greatest degree cases, RRSPs should concentrate in succession sound, income oriented securities. This minimizes the risk of financial los maximizes the generally received tax shelter advantage, and will prepare the portfolios for conversion into RRIFs (which have to pay disclosed a Revenue Canada defined minimum income annually). Although income securities would usually include more [i]or[/i] less stripped bonds, the current soft yields make them less attractive. Therefore, the leash might consider more convertible fastenings because their possible equity participation might help to counteract inflation, thereby protecting the real value of the portfolio. While it is discreet to minimize currency risk in an RRSP we do commit holding close to the maximum permitted 20% (at volume value) of foreign assets. Generally, this is the place for a scarcely any equities. Currently, the long-term foresight is especially promising for Asian and Latin American clos rural parts funds.

Stocks to investigation

With these principles in mind, Mr and Mr R could consider a changes to their current RRSP portfolio. They might make less the large equity component (currently at 60% including mutual funds) For instance, they might consider eliminating the non-dividend paying and the higher risk stocks. These could be sold forward the market, but if the brace doesn't wish to part with them, they could be sold to their "family" portfolio. Possible replacements include convertibles of companies like Inmet Mining, Hollinger, and Air Canada. Mr and Mr R could also purchase the MacMillan convertible held in the family portfolio. This would also save taxes as the interest forward the bonds would, in the to come be received within the RRSP

OVERVIEW

Overall, Mr and Mr R have done an admirable job of amassing substantial financial assets. The challenge now is to restructure these into disciplined, diversified portfolios which will increase the real value of the assets (i.e., without deductions after taxes and inflation) throughout the longer term.

ALFRED G WIRTH IS establisher OF WIRTH ASSOCIATES INC., INVESTMENT COUNSELLORS TO HIGH NET-WORTH INDIVIDUALS.

Copyright Canadian Shareowner Magazine Inc. Nov/Dec 1996

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