Happy New Year

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  Happy New Year – although it is hard to be very happy in the face of the terrible destruction and loss of life around the Indian Ocean. Everyone associated with our company extends their deepest condolences to those who lost family and friends in the tsunami disaster.

HELP TSUNAMI VICTIMS AND GET A TAX BREAK

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  We urge all our readers to give what they can to the worthy aid agencies that are working around the clock to help the tsunami victims, and we have done so ourselves. And you’ll get a tax break if you act quickly. The government has extended the tax deadline for charitable donations to Jan. 11. That means you can claim a credit on your 2004 tax return for contributions up to that time. So you help others and benefit as well.

THE ROAD AHEAD

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  This is the time of year when I give my fearless forecast of what lies ahead for investors. The tragedy in south Asia forces us to remember that we must always expect the unexpected. We have been rocked by one shock after another since the turn of the century. It would be astonishing (but also welcome) if 2005 turned out to be different. So these predictions are based on the trends and patterns that appear to be in control as we enter the New Year. But be prepared to shift gears at a moment’s notice if the situation calls for it.

Lower stock profits. My feeling is that the bull market that began in the late fall of 2002 is losing momentum. Although we saw some decent advances in 2004, they were much lower than the gains recorded in 2003. I believe we will see that deceleration continue in 2005. A market correction is coming. It may not happen until 2006 or 2007, but I feel that the major North American indexes will only record single-digit advances this year.

An income trust correction. Last year at this time, I was bullish about income trusts. This year, I am bearish. I feel the sector is overheated and that a correction, perhaps on the order of 10% to 15%, is in the cards sometime in 2005.

I expect it will happen later rather than sooner, however. The pause in Canadian interest rate increases and the passage by the Ontario government of a law to shield trust investors from liability actions should keep the market buoyant for a few months. But the reality is that many trusts look expensive right now. They can’t keep rising forever.

Bonds may surprise. The death of the bull market in bonds has been predicted by economists for the past four years. We’re still waiting. Bonds delivered decent returns in 2004, with the Scotia Capital Universe Bond Index rising 7.15%. I think we’ll see about the same in ’05. The pace of interest rate increases should slow in the U.S. by mid-year and in Canada it may be some months before our central banks tightens again.

No joy for GIC investors. At year-end, Royal Bank was paying the magnificent sum of 2.6% on five-year non-redeemable GICs. Who can live on that? We may see some slight upward movement in 2005 but if the five-year rate tops 3.5% before next New Year’s Day, I’ll be surprised. Money market investors can also look forward to another year of paltry returns. Seek out other options.

A higher loonie. As usual, economists disagree on where the loonie is going. Some predictions run as high as US90c by year-end. Others have the loonie settling into a range of as low as US78c to US86c. Since I believe Washington will continue to let the American dollar slide, I’m in the higher loonie camp. We could reach US87c to US88c this year, despite the early January pull-back.

More expensive gold. If the U.S. dollar keeps sinking, gold should keep rising. But it does not look like we’re going to see the big break-out above US$500 that many gold bugs have been predicting.

So there you have them: My fearless forecasts for 2005. Check back a year from now and we’ll see how I did.

This article originally appeared in our Internet Wealth Builder newsletter. You’ll find membership information at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=532

A LOOK BACK

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  f you want to see how my January 2004 predictions turned out, you’ll find the full story at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2100

NEW PROTECTION FOR INCOME TRUST INVESTORS

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  The Ontario government recently passed legislation to protect income trust investors from being held personally liable for the actions of a trust’s managers or directors. Alberta and Quebec already have similar legislation on the books and it is coming in British Columbia.

The result may be to encourage pension plans to invest more money in income trusts, driving prices higher. But if you’re thinking of committing your own money, you had better read this article first. http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2101

FREE RRSP BONUS

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  Now that the holiday season is behind us, it’s RRSP time again. To help you make the right decisions and to manage your plan more effectively, we’ve prepared a special report titled 9 Ways to Improve Your RRSP Performance. It’s being offered free with every on-line purchase from our website during January. Check out our specials at www.buildingwealth.ca

TWO TOP MUTUAL FUNDS TO BE CAPPED

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  Two high-performance mutual funds are being closed to new investors soon so you may want to consider taking a position before they shut their doors. Neither of them are high-profile entries, but either or both would look good in a portfolio.

First to close, on Jan. 15, is the Northwest Speciality Equity Fund. It’s run by Vancouver-based Wayne Deans and specializes in smaller companies, although it is officially classed as an all-cap Canadian equity fund.

This fund can be quite volatile, but the results show that the ups and downs are worth riding out. Over the five years to Nov. 30, investors enjoyed an average annual return of 22.5%. In the past 12 months, the gain was 24.7%, almost double the category average.

Right now, Deans is hot on oil and gas – the sector accounts for about 38% of the fund’s total assets. He also likes industrial products (16.7%) and metals and minerals (9.8%). The fund invests almost exclusively in Canada, with only a smattering of U.S. and foreign stocks.

One word of warning: when Deans hits a bad patch, things can get rough. For example, this fund lost 33% in 1998, so it’s not for the faint of heart. The minimum initial investment is only $500.

If you are the faint-hearted type, then the Chou RRSP Fund is a better choice. Manager Francis Chou has announced that the fund will be closed to new investors effective March 18. However, those who hold units at that time will be able to add to their positions after the capping, so by taking a position now you’ll keep the door open. You need $10,000 to get in.

The fund has an admirable record. The 10-year average annual compound rate of return to Nov. 30 was 18.1%, almost double the category average. The one-year gain was actually slightly below average at 12.4% but that’s normal for this fund. Historically, it has tended to outperform during bad market years and underperform when stock indexes are hot.

Chou’s goal is to make money, of course, but it is also to protect your capital. The last time this fund recorded a calendar year loss was in 1999 when it dropped 6.7% because the manager refused to get caught up in high-tech mania. His prescience paid off with double-digit gains every year since, including during the bear market.

Chou, who uses a no-nonsense value approach to stock selection, was recently named Fund Manager of the Decade at the 2004 Canadian Investment Awards gala – an honour that may come as a surprise to many, but not to readers of our Mutual Funds Update who have known about his low-profile accomplishments for years. The award may bring more business to his funds, which is not necessarily a good thing, because he doesn’t want them to get too big – hence the capping of this one.

For information on how to subscribe to Mutual Funds Update and to read a free sample issue, go to: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=80

SPROTT FUND REOPENS

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  Two funds close, but one reopens. Not many people know about the Sprott Canadian Equity Fund but it has the best (yes, the best!) track record in recent years in its category. Unfortunately, this unorthodox, low-profile entry has escaped the attention of most investors.

If you’re among them, it’s time to wake up. Sprott Canadian Equity was closed to new investors on June 30/04. However, Toronto-based Sprott Asset Management re-opened it on Jan. 4 and I recommend you take advantage of what may be a limited window of opportunity to take a position in it if it fits your investment profile. This fund has established an amazing track record since it was launched in September 1997. It got off to a slow start, losing 17% in 1998, its first full calendar year. But then it found its feet and proceeded to post annual gains of 53% in 1999, 44% in each of 2000 and 2001, 39% in 2002, 30% in 2003, and 38% in 2004. The five-year average annual compound rate of return to Nov. 30 was 40.8%. Do I have your attention? How did the managers manage to achieve such impressive gains, especially during the bear market? To understand that, you need to know where they are coming from. Eric Sprott and his associates firmly believe that we are in the grip of a long-term secular bear market which they feel is being exacerbated by the policies of the Bush Administration. The third-quarter financial report on the company’s mutual funds pulls no punches. “Over the past few years, we have seen total U.S. debt soar, interest rates fall below the real rate of inflation, tremendous fiscal spending on the part of government, money printing and tax cuts,” the report says. “Although these policies have helped stimulate the U.S. economy – thereby presenting to the world an economy that is healthy and growing – America, in actuality, has become an indebted nation that is struggling to make ends meet. Similar to a destitute family that is on the lookout for more credit, America is quickly approaching their maximum credit limit. With the costs of gasoline expected to remain high, health care premiums on the rise and money that is on the verge of rapid devaluation, the ‘bigger picture’ for the American family is looking very grim indeed.” The strategy used by the Sprott managers is to heavily weight the fund’s portfolio towards oil and gas, gold, and special situation stocks like Taser International. The fund also maintains a high cash reserve (18% as of Sept. 30). This is not a style with which everyone will feel comfortable. The company admits its approach is sometimes “unorthodox” and advises that the fund is only suitable for investors with a medium to high level of risk tolerance and the ability to deal with short-term volatility. You can buy units through a financial advisor for a minimum initial investment of $5,000. A front-end sales commission of up to 2% may apply. You should be aware that the managers are entitled to an incentive fee of 10% of the difference by which the return in the net asset value in a calendar year exceeds the percentage return of the S&P/TSX Composite Total Return Index. That can result in what seems to be a grossly inflated MER in years following a particularly outstanding performance. However, given the terrific returns of this fund since 1998, I haven’t heard any complaints.

BUYER’S GUIDE TO MUTUAL FUNDS FOR $9.95

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  People are still calling to ask where they can obtain the 2005 edition of my annual Buyer’s Guide to Mutual Funds. The answer is: they can’t, because it no longer exists in book form. However, you can still read my comments and ratings on more than 1,200 mutual funds in our On-Line Buyer’s Guide to Mutual Funds. Right now, we’re offering a three-month trial with unlimited access for the ridiculously low price of $9.95 plus tax. But this offer won’t last long so if you want to take advantage of it go to http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=526

SAVE 65% ON GET CONTROL BOOK

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  We’ve been able to make a special purchase of my Get Control of Your Money book and are passing the savings on to you.

This book offers practical solutions to a wide range of financial problems. It will help you save thousands on your mortgage, find the right insurance policy, learn how to budget properly, set up a winning retirement plan, teach your kids about money, save tax dollars, and much more.

The original retail price was $28 plus tax. However, while supplies last we are able to offer it for only $9.75 plus shipping and taxes. We reserve the right to limit quantities and when supplies are gone this offer will be withdrawn. Details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=527

BANK MUTUAL FUND REPORTS STILL AVAILABLE

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A reminder that our Special Reports on CIBC and RBC (Royal Bank) mutual funds are still available. If you have investments with either of these groups, be sure to read these reports before you make your RRSP contribution. Otherwise, you could end up with a bunch of poorly-performing funds and miss out on the gems each company offers.

For details on the CIBC Report: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=529

For details on the RBC Report: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=530

WORLD MONEY SHOW

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  Again this year, I will be representing Canada at the World Money Show which will take place at the elegant Gaylord Palms Resort in Orlando, Florida from Feb. 2-5.

On Feb. 2, I will deliver a keynote address titled The Northern Boom: How to Profit by Investing in Canada.

On Feb. 3, I will be giving a seminar titled High-Yield Income Trusts: Choosing the Best.

This event is the largest of its kind and features many prominent speakers from the U.S. and around the world. Last year, more than 13,000 people attended. Admission to most of the keynote talks and seminars is free however there is a charge for some special events. You’ll find complete details at www.WorldMoneyShow.com

If you are going to be in Florida during this period, make it a point to attend. You’ll find it to be both fascinating

DELIVERY PROBLEMS

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  Some readers are reporting delivery problems with their copy of Investing Today. In most cases, the reason can be traced to spam filters, either on individual computers or (more frequently) filters operated by service providers. To ensure that your issues are not blocked, please enter circulation@buildingwealth.ca into your address book and add it to your list of approved e-mail senders on your service provider’s website. Most service providers make provision for this; check your on-line spam box.

That’s all for this month. I’ll be with you again in February, with a report from the World Money Show.