In analyst reports, when are target prices predicted to be reached? How should I read targets that are very close to the current stock price? And how do I interpret relative ratings?
Unless an analyst explicitly says otherwise, you can assume that price targets are for 12 months from the date of the analysis. There’s some disagreement over how closely you should follow them, however.
In a 2014 paper in the Journal of Business Finance & Accounting, academics Zhi Da, Keejae P. Hong and Sangwoo Lee said that while the literature “generally agrees that analysts’ target prices are informative, the evidence on their ability to accurately forecast target prices is mixed at best.”
In other words, price targets can help investors determine whether a stock is cheap or expensive, and by roughly how much (a target-price-based trading strategy outperformed the market during the paper’s sample period). But don’t put too much weight on any exact number.
If an analyst gives a target very close to the current share price, they’re saying the company is more or less fairly valued. That doesn’t necessarily mean shares will trade flat over the next 12 months – a price target doesn’t make day-to-day predictions – but it suggests there isn’t much room for them to rise.
Earnings calls, algorithms and ... jazz music? How investors are using AI to gain a trading edge
Relative terms such as “outperform” are also indicators of direction, but it’s important to understand what they are relative to. You’ll often see the slightly clearer term “sector outperform,” which suggests the stock will do better than the average of its peers covered by the analyst over the next 12 months. Sometimes the research report or an institution’s rating criteria will indicate that the comparison is against a market index.
Be careful not to confuse “outperform” with “buy.” If an analyst expects a sector to suffer over the next 12 months, an individual stock may still “outperform” by falling less than its peers.
I am in my early 60s and still working, with a large RRSP, a good-sized LIRA and contribution room in my TFSA. I expect near maximum CPP and OAS payments. Does it make sense for me to move money from my RRSP to my TFSA? The prospect of getting tax-free growth inside the TFSA and tax-free withdrawals later when I’m getting CPP and OAS makes the idea appealing, even if I’m taxed now.
In general this is probably not a good idea, especially if you’re considering moving a big chunk all at once, said Anita Bruinsma, an advice-only planner and founder of Clarity Personal Finance in Toronto. Since you’re still working, taking a large sum out of your RRSP could easily bump you into a much higher tax bracket.
Ms. Bruinsma said it’s still good to ensure you have money in your TFSA to complement your RRSP. This could mean stopping contributions to your RRSP and directing more savings to your TFSA instead. Whether that makes sense depends on your circumstances.
“The most important thing is your tax bracket today versus your tax bracket in the future,” she said.
Opinion: Should you move your shares into a TFSA? It depends
Consider the size of your RRSP and all your future sources of income. If you have a smaller RRSP, required minimum withdrawals will also be small and may not push you to the level of Old Age Security clawbacks. If your RRSP is on the larger side, you may find that minimum withdrawals provide you with more income than you need, which can be an opportunity to contribute to your TFSA, Ms. Bruinsma said.
You mentioned your LIRA (locked-in retirement account) as well as your Canada Pension Plan and OAS payments, but think about timing.
“When are you going to take CPP and OAS? Because, of course, when you delay till 70, that is a much bigger payment, so that can have more of an impact on questions around your tax bracket and your OAS clawback,” Ms. Bruinsma said.
Opinion: What to know when your broker’s numbers don’t match yours
You’ll also want to look at what income-splitting options are available if you’re married or in a common-law relationship.
You are on the right track to be thinking about how to best use your TFSA. Having money in these accounts offers retirees flexibility in managing cash flow, as you can take less out of your RRSP to keep your income in a certain tax bracket. Money in a TFSA is also useful for “big chunky expenses,” Ms. Bruinsma said: No one wants a new car to come with a higher tax bracket and OAS clawbacks that would come with a big RRSP withdrawal to pay for it.
It’s always useful to take the time to consider what approach works best within the structure of your own specific retirement plan, which you can create on your own or with the help of an adviser or planner.
E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.