In times when there is a downturn in the markets and the value of your investments decline, it easy to let your emotions overtake your judgment and give you the impulse to sell. Investing for the most part is a long-term commitment and investors should be aware of the cost of redeeming.

Outside a registered plan, redemption becomes a taxable event. If the investment has appreciated since you purchased it, redemption will trigger a capital gain that will have to be reported on your income tax return. Since you have to pay tax on those gains it will leave you less money to invest versus leaving them invested for the long-term. Triggering a taxable event can have other repercussions, as well. If you are entitled to government benefits and credits, the increase in your income could affect them, e.g. Old Age Security clawbacks, provincial tax credit, GST/HST credits, the age amount and medical expenses. Triggering these capital gains may also put you in a higher tax bracket where even more of your income will be lost to tax.

Note: In a registered plan as long as you don’t withdraw funds from the plan when you redeem an investment, any capital gains can be realized without incurring the tax.

In some circumstances, depending on your fund’s load type, redeeming your mutual funds may also trigger fees called back-end loads. These fees usually start around 6% and decline over 6 to 7 years to 0%. If you redeem your funds before the redemption period expires, fees are deducted from your investment which further exacerbates your returns. Repeated redemption can cost you considerable money in unnecessary fees.

During volatile times in the market like we are now facing, many investors get nervous and begin to question their investment strategy. The thing to realize is that market volatility is inevitable. Long term investing is a mindset that requires discipline to keep you from making emotional decisions based on the doomsayers of the day. The keys to wealth accumulation based on the amount you save, the return you earn on those investments and lastly how long your money has to compound. The last point being the key - the earlier you start and the longer you hold investments can reduce the possibility of experiencing negative returns.

Maintaining your portfolio doesn’t mean neglecting it. This is where you and your financial advisor work together to develop a strategy to reach your long term goals and tweak it when necessary.

April 30, 2008