CAUTION IS THE WATCHWORD!

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  Happy New Year – but don’t make a big bet on the “happy” part. If the portents are right, 2008 will be a time of uncertainty, turmoil, and volatility. Your number one priority should be to come through it without serious financial damage.

Ever since the tech crash culminated in the fall of 2002, making money in the markets has been relatively easy. Unfortunately, 2008 looks as though it will be anything but benign. At this stage, it’s almost impossible to predict how the year will unfold because of all the uncertainties swirling out there. Here are just a few we’ll need to watch closely.

The subprime mortgage crisis. The big problem here is that no one is certain just how extensive this mess is and how much damage it will ultimately wreak on the financial system. Some experts contend we’ve only seen the tip of the iceberg. If they are right, financial stocks could take another beating this year and interest rates will move sharply lower as central banks struggle to maintain liquidity in the system.

So far, the subprime crisis has created a nightmare for investors who put money into what they assumed were “safe” financial services mutual funds. Over the six months to Nov. 30, the funds in this category lost an average of 13%. Not a single one made a profit. This illustrates the dangers inherent in trying to guess which areas of the market will outperform.

The Middle East. What a mess! Iraq, Iran, Afghanistan, Pakistan, Gaza, Lebanon – all are in crisis and it’s hard to see how matters are going to improve in 2008. What difference does it make to your fund investments? A lot! The assassination of Benazir Bhutto caused oil prices to leap and sent the cost of gas up about 4c a litre in many Canadian cities. The Middle East powder keg will produce more such traumatic events in 2008 and the world economy will react negatively every time.

Recession, inflation. It’s been a long time since anyone has seriously discussed the possibility of “stagflation” – a rare economic phenomenon during which growth slows or goes into reverse while prices rise. The last time it happened was during the oil shock of the 1970s and it took years to recover. Now there’s a chance we could see a recurrence if oil prices settle in at $100 a barrel or more.

Not everything is gloom and doom, however. We in Canada are relatively fortunate. Our public finances are in good shape, our housing market is stronger than that of the U.S., our resources continue to be in high demand, our currency is strong, and there is a good chance that we might be able to avoid a recession, even if the U.S. lapses into one. That doesn’t mean we can be complacent, of course. A slowdown in our economic growth appears likely in 2008 as both Prime Minister Harper and Finance Minister Flaherty have warned. But hopefully we’ll be able to come out of it better than most countries.

Nonetheless, caution should be the watchword for investors for 2008, especially during the first half of the year. This is not a time to be reckless with your money. Conservative investors should overweight their portfolios in bond or bond funds, low-risk balanced funds, and high-yield savings accounts. Better safe than sorry.

THE BIG SURPRISES OF 2007

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  Every year produces its share of investment surprises and 2007 was no exception. In fact, some of the surprises might better be described as “shocks”. Check out my personal Top Five Surprises list at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=3000 \

FEARLESS FORECASTS FOR 2008

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  Now that you’ve taken a look at the big surprises from last year, read my predictions for 2008. As you do so, remember that when it comes to money, always expect the unexpected. You’ll find the story at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=3006

SLEEP-EASY INVESTING PUBLISHED

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  My new book, Sleep-Easy Investing: Your Stress-Free Guide to Financial Success, has been released by Viking Canada, which is part of the Penguin Group. It explains how to take the tension out of money management by approaching it from a different perspective. Over the years, I have come to believe that people tend to take too much risk in the pursuit of higher returns and end up damaging both their bank accounts and their health as a result. This book tells you how to avoid that trap.

You can read an excerpt from the first chapter at http://www.buildingwealth.ca/Books/index.cfm?bid=8

Sleep-Easy Investing should be available in all bookstores or you can order it from our Best Books page at 37% off the suggested retail price. Go to http://astore.amazon.ca/buildicaquizm-20

PUT SOME MONEY INTO BONDS

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  You may not believe this but bonds actually outperformed stocks in the final months of 2007. Unfortunately, many investors didn’t own any, or not enough. If you’re in that situation, it’s time to switch gears and add some bonds or bond funds to your portfolio. We have a couple of fund suggestions for you to consider at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2999

A MYTH DEBUNKED

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  How big a hit did investors take after Finance Minister Jim Flaherty announced the imposition of an income trust tax on Halloween night, 2006? Most people think the figure was $30 billion. However, a prominent brokerage firm says it was nowhere near that much. Read the full story at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=2998

SPECIAL OFFER FOR INCOME INVESTORS

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  If you want more income from your investments without taking a lot of risk, we have a newsletter you’ll want to read. It’s called The Income Investor and it focuses on high-grade income-generating securities, many of which offer significant tax advantages.

For a limited time, we’re offering a six-month trial subscription to the electronic edition of The Income Investor (which is published twice a month) for only $36.95 plus tax. And you’ll receive two valuable free bonuses.

Bonus #1 – A copy of our new Special Report titled 25 Low-Risk Canadian Equity and Balanced Funds. This report retails for $12.95 but it is yours free when you take advantage of this special offer.

Bonus #2: A three-month trial subscription to our Mutual Funds Update newsletter, which has a 90% success rate at picking winners. Have you done that well?

For more information and to place an order, go to http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=615

Or you may call our friendly Customer Service desk at 1-888-287-8229 and they’ll handle everything for you.

YOUR QUESTIONS

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  Every month, we answer a question submitted by readers of this newsletter. Here is the January query.

Bought too many shares, lost money

Q - Several years ago I opened a discount brokerage account and bought some shares. I only intended to purchase a small number – 200 shares – but while filling out the form online an extra zero was added and I ended up buying 2,000 shares instead. I didn't have the money and had to borrow money through my credit line.

Long story short, I still have those shares, however, they are now worthless. I feel stupid for holding on to them. My question is whether I can claim the interest paid on my credit line for the money I borrowed to purchase the shares. I still have a large outstanding amount on my credit line and still pay monthly interest because of it.

Now I want to sell all 2,000 shares. How do I claim this on my income tax as a capital loss? Can I claim a capital loss if I were to sell them now when I file my income tax in March? Is this procedure so complicated that I need a tax preparer or an accountant to do my income tax?

I also have other shares on which I have to declare a capital gain (this will not offset my capital loss). Is it true that I can offset the capital loss against the capital gains indefinitely until all the capital loss is covered? – L.T.

A – Too bad you didn’t notify the brokerage firm immediately of the purchase error. They might have been able to correct it. However, that’s now ancient history so let’s deal with your questions.

Yes, the interest on the loan is tax deductible, assuming that the money was used exclusively for investing. In fact, you can go back and claim for previous years as well. See the General Tax Guide for details on how to make changes to a previously-filed return. You can go back as far as 10 years.

Claiming a capital loss on your return is not complicated and you do not need an accountant. Buy a tax preparation software program, enter the numbers, and it will do the calculations for you.

However, if you sell the shares now you cannot claim the loss until you file your 2008 tax return. That won’t be until spring 2009. So you cannot use the loss this year to offset your capital gains. The good news is that you can retroactively apply any capital losses to the three previous tax years. Losses can also be carried forward indefinitely. – G.P.

You can send your questions to me directly at gordon.pape@buildingwealth.ca – please note that I cannot give personal answers. Mark your question “Investing Today Q&A”. For more Q&A, go to http://www.buildingwealth.ca/qa.cfm

That’s all for this month. We’ll see you again in February.