I have a line of credit tied to my home and could use this for the purchase but I am also being offered a loan at a similar rate that would allow me to buy the fund without risk to my home. Which (if any) vehicle would you use?

I heard about this from a qualified financial counselor. The two items (loan and fund) have been put to me in a manner that appears very attractive. I can borrow at around 4.5-5.25% and obtain a return (depending on the actual price of the shares when I buy) of around 12%. Combined with paying what amounts to no tax on the returns, this appears too good to be true (which makes me skeptical. I'm not sure who to turn to on this. – D.C.

For starters, there’s the question of whether leveraging (borrowing to invest) is an appropriate strategy for unsophisticated investors. Generally, I advise against it because of the risks involved. The last time leveraging was popular was during the tech boom of the late 1990s and look what happened to the folks who borrowed then! That said, the risk can be reduced (but not eliminated) by investing in a low-risk portfolio or mutual fund.

Does the Clarington Canadian Dividend Fund meet that criterion? Yes, in the sense that it invests in a portfolio of blue-chip stocks, mainly Canadian issues. But that does not make it immune to losses in a bad market. For example, the fund declined by just over 8% in 2002, the last year of the millennium bear. You need to consider if you would be prepared to ride through another bear market or if you would be more likely to bail out, possibly at a loss.

Another issue raised by your question is that of return of capital distributions. The Clarington fund is structured so as to maximize the tax advantage of its payments, which currently are 8c a month (96c a year). However, there are some offsets to this. First, if you check the history of the fund’s net asset value (NAV) you will see that it tends to decline. This is because the distributions exceed the income and capital gains earned by the fund. At the end of October 2004, the NAV per unit was $7.93. A year later, it was down to $7.64, so the units fell by 29c. You still made a profit because of the distributions, but it was less than might appear at first glance.

In fact, the history of this fund shows that it tends to significantly underperform the Canadian Dividend category as a whole. Over the five years to Oct. 31, the fund produced an average annual return of 4.8%. The average dividend fund gained 8.5% a year over the same period. So that’s another trade-off you need to take into account.

I find there is a tendency for investors to believe that distributions from mutual funds are fixed. They aren’t. The company could cut back its payment at any time and Clarington has done exactly that with some of its other funds. There is no indication this is going to happen in this case, but it’s always possible.

Finally, the Clarington organization is going to change hands soon. CI Financial and Industrial Alliance are locked in a take-over battle and one of them will eventually gain control. When that happens, it is likely that the managers of this fund will be replaced.

I can’t tell you whether or not to go ahead. That’s your call. The investment could work out fine. But be sure to weigh all the pros and cons before making a decision. – G.P. (Dec/05)

The fact that the CRA has accepted this arrangement for six years means that there is probably not much danger in continuing the same way. But if you suddenly switch 100% of the interest to her return, it may start some computer alarm bells ringing that could lead to more questions than you want to answer. My advice is to leave well enough alone. – G.P. (Dec/05)

To illustrate, RBC O’Shaughnessy U.S. Growth Fund will pay out an estimated $1.75 per unit later this month. That’s 9% of the recent NAV. Suppose you buy new units for a non-registered portfolio between now and the distribution date. Here’s what would happen if you invested $10,000. You would pay about $19.50 per unit and receive approximately 512 units. Shortly thereafter, you’d receive credit for $896 (512 x $1.75) in the form of cash or new units. At the same time, the NAV of your 512 units would fall by the amount of the distribution, to $17.75. You are left with original units worth $9,088 plus a cheque or new units purchased with the payment. Either way, the amount is taxable. The effective result is that you end up paying tax on about $900 of your original capital. Obviously, that’s not a position you want to be in so be extra careful with your fund shopping this month. – G.P. (Dec/05)

The fact that gold has been on another tear recently is, I think, more due to the continued weakness in the U.S. dollar and the perception that it may fall further against major world currencies in 2006 due to the huge U.S. fiscal and trade deficits. It’s no coincidence that the emergence of gold from the doldrums a couple of years ago coincided closely with the first big drop in the greenback. Remember that the American dollar has long been treated as the world’s reserve currency. Now that it is steady losing value, investors and central banks are looking for an alternative and gold is a traditional store of wealth.

Compounding the problem is a cut-back in the world gold supply. South Africa, the world’s largest producer, reported a 15.4% decline in production for the year to Sept. 30. Rising demand and dwindling supply always add up to high prices. On this basis, I expect gold will keep trending higher for a while, although there will be corrections along the way.

I think the best way to invest in gold is through a precious metals fund. One possibility is the RBC Precious Metals Fund, which gained 20.5% in the six months to Oct. 31. It’s no load and you can take a position with a minimum of $1,000. Ask your financial advisor. – G.P. (Dec/05)

He has been contributing to his RRSPs since his graduation (2001) and has accumulated about $12,000. We haven't set one up for me yet and are debating doing so. Neither of us has any credit card debt; we pay off everything each month. Our combined income is about $65,000.

We are stable financially, currently rent (although we do want to buy in the next couple years), and we just aren't sure what we should do. Do we increase our payments on my LOC? Increase his RRSP contribution? Open up a second RRSP in my name? (Is there any benefit in having RRSPs in each of our names? Do we not use the same money come retirement?) Open up an ING account? We plan on using some of RRSP money for our first home, although we don't really want to use any more than $10,000 if we don't have to. Thank you for any advice you have! – Tara C.

As far as RRSPs are concerned, yes it makes a lot of sense to have two plans. It is not all the same money in retirement, at least for tax purposes. And while it is not something you want to think about so soon after the wedding the fact is that some marriages don’t make it that far.

Assuming you do get there, having all the retirement money flow to your husband would be bad tax planning. The goal is to have both spouses with more or less equal income in retirement. This may avoid having one of you end up in a higher tax bracket and may keep both incomes below the threshold for the Old Age Security clawback. So opening up an RRSP for you is certainly a viable choice.

Paying down the line of credit is also a good option. Assuming the interest is not tax deductible, it is probably costing you about 5.75% right now to carry the loan. That’s $575 a year on a $10,000 balance. By reducing the principal, you cut the loan charges and leave more money in your picket.

Either solution is good, so here’s a suggestion. Make your RRSP contribution. Then apply the refund against reducing the line of credit. You win both ways. – G.P. (Dec/05)

However, if you own the “Fund”, you’re stuck. Any capital gain you may have would be subject to tax at the applicable rate.

My Mutual Funds Update newsletter currently rates only one AIM Trimark fund as a buy. That’s AIM International Growth Class. It is one of the tax-sheltered entities under the umbrella fund. You should know, however, that its management style is more aggressive and therefore higher risk than the Trimark fund you own. – G.P.

Our previous adventure in RRSPs is nothing more than a monthly contribution of $50 over the past five years into something that's not grown in the least.

Obviously we're looking at the cost of school for our oldest and then that of each additional child as they leave secondary school. Our jobs are secure and I have an pension that I've been contributing to for the past 10 years but my wife has nothing through work.

Recently, we've been talking with a financial planner who's encouraging us to borrow significantly to get an investment started and to use the returns to clear off the other loans. We'd be paying slightly more to cover this investment than the car loans took from us and for twice the length of time. I understand that's the cost of starting late and needing to give this a jump-start to get in the game. I also know we never have anything left over after each payday and often dip into overdraft just prior to getting paid again.

Given we can manage to budget ourselves and find the additional money to afford this initiative should we base the investment size on the maximum amount we can undertake. We're talking roughly $60,000 between us and getting back enough in this first year to clear one car payment off. In the second year we'd look to bump that up and clear all other debts and be paying only for this investment.

We both have substantial amounts of unused RRSP contributions to work within. – Peter K.

One of these traps is overestimating returns. For example, you talk about earning enough in the first year on a $60,000 investment to clear one car payment. You don’t say how much that is, but you say your auto loans total $27,000. If that covers two cars and is equally divided, you need $13,500 to retire one loan. That would be a return of 22.5% on $60,000, before tax, which is unrealistically high. In fact, any projected return greater than 8% implies an excessive degree of risk. You need to weigh this very carefully.

Your financial advisor may have your best interests at heart. However, you need to understand that the advisor stands to benefit from having you take this loan by the extra commissions the invested money will generate. You might want to seek a second opinion from a fee-for-service planner who does not earn commissions and charges a flat or hourly rate for counseling.

The conservative route is dull but safe. Get control of your budget. Start putting more money aside each month to pay off the car loans. When that is done, begin regular RRSP contributions for your wife. It’s not exciting and will take time, but you won’t be opening yourself to major risks. – G.P.

You may also want to subscribe to a newsletter to provide on-going guidance and ideas from professionals. Again, there are many but I suggest you choose one that is based in Canada. That way, you’ll receive information on both Canadian and U.S. markets and the tax information will be relevant. I publish a weekly letter that was named one of the top five in Canada by The Globe and Mail. It’s called the Internet Wealth Builder and you can get more information about it and order a three-month trial subscription at Click Here – G.P.

If your friend will have income below the threshold amount in retirement, then contributing to an RRSP is not a good idea. Money drawn from an RRSP or RRIF will be included in ordinary income and every dollar received will reduce the GIS payment by $0.50. Your friend would be better to cut costs in retirement by reducing or eliminating her debt. – G.P.