The markets are looking a bit shaky and I have been reading about the “sell in May and go away” strategy. Is it a good idea?
I would never use the strategy myself, for a few reasons. First, although there is some evidence that, over the long term, the six months from November through April have produced higher returns than the period from May through October, I have never seen a persuasive explanation as to why this would be the case. That makes me wonder if it’s just a statistical quirk.
Others who have examined the historical data are also skeptical.
In his book Debunkery: Learn It, Do It, and Profit from It – Seeing Through Wall Street’s Money-Killing Myths, U.S. money-manager Ken Fisher points out that other – equally dubious – seasonal patterns emerge if you analyze the data long enough. For example, from 1926 to 2009, the months of June, July and August actually had a higher return than any other consecutive three-month period. So, if you sell in May, you’ll miss out on the best three months.
A second reason I’m skeptical of “sell in May” is that the strategy often backfires. Last year, for instance, the S&P/TSX composite total return index gained 7.5 per cent from May 1 through Oct. 31. Had you sold in May, you would have left a lot of money on the table. What’s more, in seven of the 10 years before that, the S&P/TSX composite also had a positive total return from May through October, which doesn’t exactly inspire a lot of faith in the adage.
Third, if you’re investing in a non-registered account, selling in May could trigger capital-gains taxes, not to mention tradings costs. Finally, if you’re out of the market from May through October you’ll miss out on six months’ worth of dividends. For a hard-core dividend investor like me, that would be torture.
For all of the above reasons, I believe that staying invested all year round is a far better strategy. It’s also a lot less work.
Last fall, I purchased a Home Trust guaranteed investment certificate (GIC) through my discount broker, RBC Direct Investing. When I asked RBC about Canada Deposit Insurance Corp. (CDIC) coverage, I was told I would need to contact CDIC directly in the event of an issuer failure. Is this true?
No, it’s not true that you would have to contact CDIC if the GIC’s issuer (in this case Home Trust, a subsidiary of troubled mortgage-lender Home Capital Group) were to fail.
The method by which CDIC reimburses depositors depends on the type of account involved, but in no case are depositors required to initiate the process by contacting the insurer, CDIC spokesman Brad Evenson told me. Rather, CDIC would have access to information regarding depositors at the failed institution – including names, addresses, account balances and accrued interest – and would automatically start the reimbursement process. (Mr. Evenson was speaking generally and did not want to comment on the Home Capital situation specifically.)
With non-registered accounts, reimbursement is straightforward. Within three days of the failure, CDIC mails cheques directly to depositors. (CDIC insures eligible deposits at member institutions up to a maximum of $100,000 – including principal and interest – a person per insured category. For details of what’s covered, see cdic.ca.)
With registered accounts such as registered retirement-savings plans (RRSPs), registered retirement-income funds and tax-free savings accounts (TFSAs), the process takes a bit longer. That’s because the Canada Revenue Agency has to be kept in the loop and because funds must be transferred to another financial institution – as opposed to being sent to the customer directly – in order to retain their registered status.
Registered depositors “would get a letter from CDIC saying that we are holding this money and it will be transferred to another financial institution,” Mr. Evenson said. The depositor would then have to provide instructions to the financial institution regarding where the money should ultimately be sent – such as an RRSP account at another bank.
In the case of trust accounts – such as registered education-savings plans – the process is a bit more complicated. That’s because the level of reimbursement depends not just on the amount of money on deposit but also on the number of beneficiaries. For example, if a trust has $500,000 deposited at the failed institution but just one beneficiary, only $100,000 would be eligible for coverage. But if the trust has five beneficiaries, each would qualify for $100,000 of coverage – or $500,000 in total.
For this reason, “we require the beneficiary information before we do the payout,” he said.
When making non-cash contributions of securities “in kind” to one’s tax-free savings account, are there any tax implications?
Yes. Contributing securities to a TFSA (or other registered account) counts as a “deemed disposition.” If the securities have appreciated in value since you purchased them, you would have to report a capital gain based on the market value at the time of the transfer. For tax purposes, it’s as if you sold the shares, contributed the cash to the TFSA and then repurchased the shares. Unfortunately, if the shares have fallen in value, you don’t get to claim a capital loss when you make an in-kind contribution. In this case, it would be considered a “superficial loss” because you have maintained ownership of the securities. To claim a capital loss, you would have to sell the securities, contribute the cash and then wait at least 30 days before repurchasing the shares in the registered account.Report Typo/Error