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Are RRSP's the best way to save for retirement? Part 1 of 3
2007-11-27 16:26:00
You may be surprised to learn that there are many people who absolutely detest the idea of RRSP's. I remember a meeting with a senior citizen, well into retirement, who became visibly red in the face with anger when explaining to me how much less he had to spend in retirement thanks to the tax laws surrounding RRSP's and RRIF's. And he is not alone.I don't want to scare you: RRSP's can be great for some/most people. BUT, if not planned properly, you can end up shooting yourself in the foot come retirement time. If anything, this section is designed more to get you thinking about how well you plan your finances and the future (as best as one can given the long time frames and uncertainty of capital markets and tax laws, etc.).So let's begin by taking a sample Canadian. Let's assume our test subject, Anna, is 30 years of age today (2007) and earned $50,000 last year. She has decided that this year, and from now on, she will save 10% of her gross income for retirement which she ...
More About: Retirement , Part , Save , Retirement planning , Tire

Minimizing the RRSP Withholding Tax on Withdrawals
2007-11-27 06:22:00
You'll recall that withdrawals from your RRSP are normally included as income in the year that you make the withdrawals (save for a few exceptions). If you happen to be in a low income year and have the need to make a withdrawal from your RRSP, then it might make sense to space out your withdrawals such that you minimize the withholding tax that your RRSP issuer will remit to the Government on your behalf...For example we know that your RRSP issuer will withhold the following percentages if you ask to make a withdrawal from your RRSP:Withdrawal of up to $5,000       ;    =    10% WithheldWithdrawal of $5,001 - $15,000    =    20% WithheldWithdrawal of $15,001 and above =    30% WithheldSo let's say you are in a year where you have NO income from work and you decide that in order to pay your bills you will have to withdraw approximately $17,500 from your RRSP. In Ontario, someone with ...
More About: Retirement planning

Lifelong Learning Plan (LLP): Borrow from yourself to finance your educatio
2007-11-26 22:33:00
This program has a lot of similarities to the Home Buyer's Plan . The Lifelong Learning Plan (LLP henceforth) is a program that allows you to make a zero-interest loan to yourself from your RRSP for the purpose of financing the education of yourself, or a spouse/common-law partner. The withdrawal of those funds will not be subject to tax so long as you abide by some rules of participation.The BasicsUnder the LLP, you are entitled to withdraw a maximum of $20,000 from your RRSP (tax-free) for the purpose of enrolling into a qualifying educational program offered by a designated educational institution. You can use the funds for yourself, or for your spouse or common-law partner - but not for your children. The maximum you can withdraw in any one year of the program is $10,000, but you can make withdrawals (subject to the annual $10,000 limit and $20,000 overall limit) during the period of the calendar year you first make a withdrawal and up to January of the 4th year after that year ...
More About: Finance , Retirement planning , Lending

The Home Buyer's Plan (HBP): Borrow from yourself to help with home ownersh
2007-11-26 00:55:00
The Home Buyer's Plan (or HBP for short) was introduced by the Canadian government to assist first time home buyers with owning their first homes. It is actually a provision that allows you to take a zero-interest loan from your own RRSP for up to $20,000 that must be repaid over 15 years and without causing that RRSP withdrawal to incur any income taxes. (If you remember, if you make a withdrawal from your RRSP, those funds are normally included as income in the year of withdrawal - the HBP is one of a few exceptions to this rule.)One common misconception is that the funds need to be used towards the down payment. Actually, there is no requirement that the funds be used towards your home purchase in any way at all! If you wanted to take advantage of the program to pay for a cruise around the world, you are completely entitled to do so... but that may not make much financial sense... :)There are some conditions that you must meet in order to qualify for the program, and of course t...
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Save to an RRSP or Pay off your Mortgage? Part 3 of 3
2007-11-23 17:16:00
Continuing from Part 1 and Part 2 in this series, we will now explore what happens when we change our long term expectations of return on our investment portfolios. I looked at increasing the ROR from 8% to 10% (1% interest, 2% dividends, 2% realized capital gains, 5% unrealized capital growth) and I also looked at decreasing the ROR to 6% (1% interest, 2% dividends, 1% realized capital gains, 2% unrealized capital growth).Here are the annual after-tax incomes, in today's dollars for the lower ROR of 6%, the base ROR of 8% and the higher ROR of 10%:Scenario A - Surplus funds go to the RRSP first, tax refunds not used productively, once mortgage is paid off that money is re-directed to the RRSP6% ROR = $31,250     8% ROR = $40,000     10% ROR = $54,800Scenario B - Surplus funds go to the mortgage first, tax refunds not used productively, once the mortgage is paid off the RRSP is started6% ROR = $31,500     8% ROR = $38,000  ...
More About: Mortgage , Save , Part 3 , Retirement planning

Save to an RRSP or Pay off your Mortgage? Part 2 of 3
2007-11-23 02:35:00
Continuing from Part 1, now we will examine the next scenario...Scenario B: Pay down the mortgage first - RRSP refund not used productivelyIn this scenario the set mortgage payment remains $2009.47 BUT, additional funds are directed over and above the set payment. The surplus (of 5% of the sample investor's gross salary - which is also growing in line with his salary at 4% per year) will serve to accelerate the mortgage - and once it is paid off, all of those funds ($2009.47/month + 5% of his ever growing salary) will be directed to his RRSP.Here is the new graph: You are already familiar with the basics of the graph as described in Part 1 of this series - so let's just focus on what's different. Point A is of interest because in this scenario surplus funds are used to pay down the mortgage - so the net worth is equal to the equity in the house - hence there is no green area above the yellow line.The mortgage is, however paid off much earlier than 25 years. In fact it is pai...
More About: Mortgage , Save , Retirement planning , Lending

Save to an RRSP or Pay off your Mortgage? Part 1 of 3
2007-11-22 21:45:00
This is one of those debates that will probably rage on without ever clearly being decided anytime soon. So instead of telling you that either paying down your mortgage more quickly OR saving to your RRSP is unequivocally better than the other, I will instead provide you with some insight that will allow you to make a more informed decision for your own situation.There have been some very adamant proponents for each strategy and I would caution you that when considering their arguments, look at what assumptions they are making with respect to the individuals' financial situations, investment experiences and attitudes. For example, not everyone has the same asset allocation, rate of return, mortgage interest rate, investment knowledge, etc. So while a compelling argument can be made based on a certain individual profile, the conclusions may not be transferable to other profiles - i.e. YOU! :)With that in mind, let's take a look at the basic argument:By putting money away into your ...
More About: Mortgage , Part , Save , Retirement planning , Lending

Two Ways to Kickstart your Child's RRSP Account
2007-11-22 03:46:00
Most people find out later in life just how important it is to start saving early. Here are two strategies you can use to help your children start saving early.YOU CAN SET UP YOUR CHILD'S RRSP AS SOON AS THEY FILE THEIR FIRST TAX RETURNYou may have thought that you have to be 18 to set up an RRSP, but there is no minimum age restriction. The only requirement is that you have generated RRSP contribution room by claiming earned income - which can be done by filing a tax return. Some people choose not to file tax returns for their children because they may not be earning enough income to have to pay taxes. While that may be true, by filing a return for them nonetheless, you can start generating RRSP contribution room. Every little bit helps. Let's look at what $100 dollars grows to in progressively longer intervals (assuming a 10% rate of return).10 Years = $25920 Years = $67330 Years = $1,74540 Years = $4,52650 Years = $11,73960 Years = $30,448So for those who are self-employed and ...
More About: Retirement planning , Account

Call Options: The Basics
2007-11-21 06:36:00
A very highly respected Canadian financial blog, The Million Dollar Journey (which I read every day), had asked me to guest-author a series of articles on Call Options . FrugalTrader (the person who runs that site), has posted all three parts in the series on his website. I highly recommend checking out the articles and you can do so by clicking on the links below. The content was written such that new investors would be comfortable with the material, while slowly progressing to a level that would appeal to experienced "do-it-yourselfers" as well.Click Here to Read Part I: The Basics of Call OptionsClick Here to Read Part II: Examples of a basic Call Option in ActionClick Here to Read Part III: A Conservative Call Option Strategy I Recommend You Look At
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The Individual Pension Plan (IPP) - Convert your RRSP to a Defined Benefit
2007-11-20 05:25:00
If you A) own 10% or more of a company or B) earn more than $109,250 in 2007 you may be a candidate for setting up an Individual Pension Plan (or IPP for short). An IPP is best described as the Cadillac of defined benefit pension plans.First some clarification: A "Defined Benefit" pension plan is when the benefit payments are defined - or in plain English: you know exactly how much you will receive in pension payments every month until the day you die. This is as opposed to a "Defined Contribution" pension plan - where you only know how much you put into the plan, and based on your investment selection you may have more money than with a defined benefit plan... or less!Defined Benefit plans are slowly going the way of the Dodo bird as companies are finding that their pension payment obligations are much higher and longer than they bargained for - hence they have been able to transfer the liability of retirement savings to the employee by dismantling Defined Benef...
More About: Convert , Retirement planning

Diversify your blog reading...
2007-11-15 22:49:00
FrugalTrader over at the Million Dollar Journey blog had asked me to write a guest series on Call Options. Part I of III appears today on his blog - please click here to take a look.And while you are at it - he was also gracious enough to host the latest round of the "Carnival of Personal Finance" which is a collection of personal financial articles written in the last week from almost 100 other blogs! It moves from being hosted on one site to another - and last week was The Million Dollar Journey's turn to host. I was lucky enough to get selected for an article I wrote on Google Finance Beta. Click here to see ALL the articles that made this week's carnival.I'm pretty swamped today - don't know if I'll be able to post a proper article tonight or not - so perhaps these links will suffice for today! :)Have a great day everyone! If you found this article of interest, please consider subscribing to my RSS Feed. If you want to learn more about what an RSS Feed ...
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Naming a Beneficiary for your RRSP: Avoid unnecessary tax
2007-11-15 03:27:00
If you've set up an RRSP account you'll know one of the standard questions on the application form will ask, "Who do you want to name as Beneficiary for this account?". If you opened the account a long time ago you may have forgotten who you originally named - it happens a lot actually: I've seen some accounts where the plan-holder's brother, sister, mother or father is named as beneficiary - and you may want to review that decision, especially if you've since started your own family.The Beneficiary is the person who will receive the value of your RRSP should you die. Unless you name a QUALIFIED BENEFICIARY, the full value of the RRSP is taxable as earned income on your terminal return.This can have unintended consequences since the remaining estate will be responsible for the taxes while the full value of the RRSP will have been transferred to the beneficiary. With the estate owing the taxes, and if there were other beneficiaries of the remaining estate - the other b...
More About: Retirement planning , Avoid , Nami , Naming

RRSP Withdrawals are subject to Withholding Taxes
2007-11-14 04:37:00
Whenever you make a withdrawal from your RRSP there will be a withholding tax applied. Actually, it would be better to say that financial institutions "WITHHOLD tax" and remits it to the government on your behalf. The way the terminology is used makes it sound like a special type of tax - but it isn't: it's income tax!The reason your financial institution will withhold tax and remit it to the government is because when you take money out of your RRSP it is considered taxable income - just like you earned it in salary for example. If you remember, the tax reduction you get when you make an RRSP contribution is generated because the government lets you deduct it from your earned income for that year. Well, when it comes out again it then becomes taxable. Just as a Mountie always gets his man - the CRA always get their taxes! Your financial institution is required to withhold the following amount of tax on a withdrawal from your RRSP:Amount of Withdrawal    &...
More About: Taxes , Retirement planning , Subject

Holding your own mortgage inside your RRSP
2007-11-13 03:36:00
Normally the sequence of reactions to the discovery that you can hold your own mortgage inside your RRSP (and essentially pay yourself interest instead of the bank) goes from tremendous excitement to indifference (after some serious number crunching anyways).To cut to the chase: YES - you can hold your own mortgage inside your RRSP. The interest that you were paying the bank can instead be going to your RRSP. But don't confuse the "badge of honour" of crafting a complex financial strategy get in the way of a true financial analysis. I would say that this strategy (like many) has a real sweet spot in terms of who it is right for. Let's find out why...HOW IT WORKSFirst off, you need to have more money inside your RRSP than is outstanding on your mortgage (well, technically you can setup a mortgage sharing strategy with your bank - but that is beyond the scope of this discussion for now). What you are doing is essentially turning your RRSP into "the bank".Instead ...
More About: Mortgage , Inside , Holding , Retirement planning , Lending

Using your RRSP to level your income while you are working...
2007-11-12 20:33:00
Certainly you may know that making a contribution to your RRSP will allow you to reduce the taxes you pay in a given year. And you know that in exchange for allowing you to deduct the contribution from your income now, you will have to claim the withdrawal of funds from your RRSP as income in exchange (and be fully taxed on it). And of course, while the money is in there for a long period of time, it is expected to grow faster since the RRSP is a tax-shelter.But RRSP's aren't always used for retirement planning.Many people with cyclical income can use it as a way to level out their income in a very tax-advantaged manner. This would be applicable to salespeople or pretty much anyone who experiences years of high income and subsequent years of lower income. If your income levels vary substantially and tend to work in cycles - then you certainly will want to look at this strategy.In a nutshell, you would make and claim RRSP contributions in years that you have high earnings and then ...
More About: Income , Retirement planning , Working , Workin

Albert Einstein knew a thing or two about investing...
2007-11-10 02:27:00
I'll explain down below. In the meantime, I want you to answer the following question as fast as you can based on your gut instinct:You have been offered a job contract for exactly 30 days and 30 days only. You have to choose between two ways of being paid:1) $100,000 per dayOR 2) You start at 1 penny for your first day, but every day your pay doubles. (i.e. your pay on day 2 is 2 pennies, and you earn 4 pennies on day 3, etc.)Which pay structure would you choose? Make your decision RIGHT NOW....If you were like me, you would have a feeling in the back of your mind that it probably would make more sense to choose the doubling pay since the power of compounding growth is explosive, given time. But then you would do the quick math and consider that $100,000 per day for 30 days is a cool $3,000,000! So, if you were like me, you would have chosen the $100,000 per day.Let me give you some more information - and see if you would change your mind. I will tell you that for the "d...
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"Parking" your RRSP Contribution
2007-11-08 05:16:00
You may have heard this term thrown around (and probably towards the latter half of February every year in particular). It refers to the fact that if you have procrastinated to the point where you don't have time to make an informed investment decision with any funds you plan on contributing to your RRSP before the RRSP contribution deadline, you can just put the money into your RRSP account as cash (or in a money market mutual fund) to beat the deadline, and then make the investment decisions later - when you might have more time to do so.This is quite common actually, as many people will contribute on the very last day possible (the 60th day of the new year) - similar to the propensity of people to file their taxes on the very last day possible too!By "parking" your RRSP contribution - and hence, beating the contribution deadline - you will be able to claim the contribution on your upcoming tax return you will be filing a few months later. As such, you will be able to r...
More About: Parking , Contribution , Retirement planning

Self-Directed RRSPs versus Managed (or Directed) RRSPs
2007-11-08 04:00:00
When you decide to start saving for your retirement with an RRSP account, you will choose if it will be a "managed" (or "directed") RRSP account or a "self-directed RRSP" account. There are two main differences between the two types of accounts:1) The nature of the investment product shelfand 2) FeesManaged (or Dire cted) RRSP's With a Managed RRSP - you are basically limited to GIC's (Guaranteed Investment Certificates), Canada Savings Bonds and a limited selection of Mutual Funds. There is usually no annual account administration fee - and to be blunt, the level of investment advice you will receive from the advisors will be adequate to get started and that's about it. The investment decisions will be based mostly on your answers to a standardized questionnaire.Self-Directed RRSP'sI don't know if the name is as fitting as it could be. There are many investors who will setup a discount brokerage account for their RRSP's and these are ver...
More About: Versus , Retirement planning , Rect

Try to hold your fixed income positions inside your RRSP
2007-11-07 04:55:00
Since your RRSP is a tax-sheltered environment your investments and investment transactions lose their tax identity while they are inside it. In other words, nothing that happens inside your RRSP causes you to pay tax inside your RRSP.This can be used to your advantage to reduce your overall tax bill if you try to keep your fixed income investments inside your RRSP (and your non-fixed income investments OUTSIDE your RRSP). You probably already know that if you can reduce the tax your investments and investment growth is subject to, you can grow your assets more quickly.Any interest income you earn on your fixed income investments is taxed in the year the interest is earned by the investment (and not when you actually receive it either!) at your highest marginal tax rate. That means that if you had earned 5% interest on a bond, the 5% in interest you receive this year is taxed at your marginal rate. If your marginal rate was, say 40%, then 40% x 5% interest payment = 2% - which is lo...
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Two RRSP Loans at the same time...
2007-11-06 16:25:00
Some Canadians will take out TWO RRSP loans at the same time. Your first question might be, "Why not just get one bigger loan?". The answer (for them) is cash flow management. This strategy is similar to a traditional RRSP loan except if you know you are going to apply the tax refund towards reducing the monthly payments - this is an alternative way to do that which ensures your monthly cash flow directed towards the RRSP Loan repayments are reduced from the get-go.Let's again look at our example Canadian, Joe. He earned $50,000 last year, and let's say he wants to contribute $9,000 in total. According to the now familiar Ernst & Young RRSP Savings Calculator, we know his refund will be approximately $2,804.Instead of getting one RRSP loan for $9,000 - he will get one that is equal to the tax refund ($2,800) and one for the balance ($9,000 - $2,800 = $6,200). In addition, he will elect to defer starting the payments on the $2,800 loan for 6 months - this is more than...
More About: Loans , Time , Retirement planning , Lending

Google Finance Beta: My new favourite website!
2007-11-05 15:10:00
Over the last few weeks I have been spending inordinate amounts of time playing with Google Finance . It has slowly become my site of choice for investigating both stocks and mutual funds - and I should point out I have a "special" version of Morningstar and Globefund on my broker terminal, not to mention a direct feed to Reuters. (I have to admit the info from Reuters is unbelievable - by clicking on a stock symbol you can pull up everything from market depth to option chains to technical analysis charting functions and on and on and on - in fact there are probably over 50 different views I haven't even gotten around to exploring.)But back to Google Finance - if I only had one financial research tool available to me, it might be this one. It is very intuitive to use, which is probably it's best feature. There is a search bar, just like with a regular google.com search, but when you start typing it will automatically suggest stock and mutual fund ticker symbols. Just clic...
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The Traditional RRSP Loan
2007-11-04 22:59:00
I routinely come across people who get an annual RRSP loan - so I thought I would talk about this common strategy - although I personally think there are better ways of saving regularly to an RRSP (i.e. without having a constant interest cost!) In a nutshell - you borrow money from a bank in order to make a larger lump sum contribution to your RRSP before the contribution deadline. This allows for a large tax refund, which is then applied to the outstanding RRSP loan balance. You can then choose to lower your monthly RRSP loan payments or shorten the duration of the RRSP loan due to the lump sum repayment from the tax refund.Many people find it hard to "voluntarily" contribute to their RRSP's on a regular (i.e. monthly) basis. In fact, some people find that they take out the loan because they are less likely to miss a loan payment then they are to miss a voluntary contribution. I suppose we can blame this on the tendency for people to finance everything as opposed to savi...
More About: Loan , Retirement planning , Lending , Traditional

The RRSP Overcontribution Limit - think twice before using it!
2007-11-02 00:50:00
Yesterday I talked about how over-over-contributing to your RRSP can make sense in a very special circumstance - since the balance is subject to a hefty 1% PER MONTH penalty. I thought I would talk today about the "regular" over-contribution limit since I have never really mentioned it before.(I know a lot of people will have heard that you should use it - but I would warn you to read the following first - otherwise you could subject yourself to some nasty double-taxation!)You are allowed to over-contribute to your RRSP by $2,000 without incurring any penalties - but note that the contribution does not qualify as an income deduction for that tax year. Ultimately that means you can add the $2,000 to your RRSP account but not expect any tax reduction on your tax return for it.So why would you want to over-contribute? That $2,000 will still grow tax-free once it is inside your RRSP - and I'm sure you've been beaten to death about the advantages of tax-free compounding - so ...
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When "over"-over-contributing to an RRSP can make sense...?
2007-11-01 00:35:00
This is an advanced level topic - keep reading to find out why... One too many "over"'s? Well, first you have to be familiar with the lifetime $2000 over-contribution limit. As you are probably aware, when you make a contribution to your RRSP it qualifies as a tax deduction, but of course only when you are within your "contribution limits".You may also be aware that there is a lifetime $2000 over-contribution limit which means you can exceed your contribution limit, but you won't be able to deduct the contribution from your tax return. So while you won't get a tax refund for that "over-contribution", many people will still suggest taking advantage of the over contribution limit as early as you can in order to take advantage of tax-free compounding on as much money as you can.You may ALSO know that any balance you contribute over and above your allowed contribution (and $2000 over contribution) is subject to a hefty tax of 1% PER MONTH. Certainly...
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Canada Pension Plan: Good for another 75 years...
2007-10-30 14:02:00
According to actuaries, the CPP (Canada Pension Plan ) is viable and strong for another 75 years based on a report presented to government by the Office of the Chief Bean Counter Actuary. I took a look through the 132 page report and it is pretty detailed.Section 6 outlines the uncertainty of the projections and further provides an analysis of a generally younger population and a generally older population than they are expecting. It further analyzes the impacts of varying levels of financial market "shock" - including consecutive years of negative double-digit returns coupled with higher equity exposure in the portfolio.It looks like even if there was a triple-threat of 1) Longer life expectancies than they think (projected out to 2050), 2) People retiring earlier and 3) Moderate to Severe financial market shock that the legislated contribution of 9.9% would only need to be increased by 30-50 basis points (i.e. 9.9% increased to 10.2-10.4%). And if you are "emplo...
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Employment Insurance: Earned Income for RRSP calculations?
2007-10-29 04:21:00
I'm just throwing out a quick one tonight as I have a full day tomorrow - out of the house before 7am and not back until midnight... :(You may or may not know that when calculating how much you can contribute to your RRSP you have to look at LAST year's earned income.  "Earned income" is the important thing, because not all sources of income are "earned" income - and therefore do not factor in for the calculation of your RRSP contribution.One distinction is with respect to Employment Insurance Benefits. If you are on EI because you lost your job - then whatever you get in regular EI payments DOES NOT make up part of your earned income. BUT if you are receiving SUPPLEMENTARY EI benefits (which for most people is when you take EI for not being at work for maternity leave) then the supplementary EI benefits DO COUNT for your earned income.So your EI payments don't create RRSP room - unless you're preggers! There - told you it was a quick one. I'll be back ...
More About: Income , Retirement planning , Calculations

RIM was bigger than the Royal Bank... for a few hours
2007-10-26 07:47:00
I don't know if many people caught this, but on Wednesday during the day Research in Motion (RIM - the maker of the Blackberry) increased in share price enough to become Canada's largest publicly traded company by market capitalization - overtaking the Royal Bank ! By the end of the day though, RIM had fallen back to number two...When investors refer to the IT sector in Canada - really they are referring only to RIM - there are no other major players anymore in that space - in fact, every analyst seems to chuckle when they mention the "IT sector in Canada" these days since it is strange to call one company a whole sector.By the way, the last time a hi-tech company was the largest public company on the TSX was... Nortel. But don't worry, RIM actually has revenue and accountants... lol :)  If you found this article of interest, please consider subscribing to my RSS Feed. If you want to learn more about what an RSS Feed is, click here.For special deals for reader...
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So what IS a Mortgage-Backed Security? (MBS)
2007-10-25 21:47:00
So yesterday you found out that your bank may not actually own your mortgage anymore (even though they still "operate the storefront"). And you know that this amazing feat was accomplished through the securitization of your mortgage into what is known as a Mort gage -Backed Security or MBS for short.But let's look at it from the investor's side today! You can buy and sell these MBS's all day long - but before you do that, it might help to learn a little bit more about their risk-return characteristics... :)To cut right to the chase, MBS's trade just like bonds. They have a price, coupon payment, yield and maturity date. But there is a LITTLE bit more to know - because they are actually very attractive investments for more conservative investors.  You see, most MBS's are technically NHA MBS's. (Yeah, I know the financial industry has a love for acronyms - or as I like to say "TFIHALFA" which stands for "The financial industry has a love for acronyms&...

Do you know who owns your mortgage? You probably don't...
2007-10-25 05:34:00
Similar to the capital markets, there exists a "primary" market for mortgages and a "secondary" market as well. You will be very familiar with the primary market - that is the market you deal in when you first get a mortgage or negotiate the terms of your mortgage renewal with your local bank (or other mortgage provider, like a trust company, etc.).But you may be surprised to find out that even though your mortgage statement reads "Royal Bank" or "Wells Fargo" or whomever your mortgage provider is, they may no longer actually hold your mortgage. Sounds confusing?Well, what normally happens these days is that a bank will group a whole bunch of mortgages with similar terms, renewal dates and interest rates and package them together in a bundle and then "securitize" them - or in other words sell these packages to investors.  These "packages" are known as "Mort gage -Backed Securities" or MBS's. The banks do this ...
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What is the "Beta" of a portfolio?
2007-10-23 20:22:00
Beta is a term used to measure the correlation of volatility of a portfolio against the index in which it resides. The market has a Beta of 1 since it IS the market. Your portfolio would be more volatile than the market if it had a Beta higher than 1. Conversely, if your portfolio had a Beta of less than 1, it means that you have less volatility than the market.As an example, let's say that you owned 20 stocks found in the S&P 500 and that the index (the S&P 500) returned 10% over the last 5 years. If your portfolio returned 10% but had a Beta of 0.5 than your portfolio (from a risk versus return point of view) was better than holding the index. This is because your portfolio had HALF the volatility of the index, yet produced similar returns.Beta is useful information (and widely available information) when looking at mutual funds. If you see a mutual fund that has the same 10 year return as the market but the Beta is 1 or higher, is it worth owning? If you can fi...
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