It's simply a matter of making your money work harder. When you defer tax payments, you increase the growth potential of your portfolio.

Long-term, tax-deferred compounding is critical to portfolio performance. To help emphasize the importance of this approach, consider the following example.

Imagine that you invested $1 in a mutual fund that doubles by year-end and is then sold. Imagine further that you use the after-tax proceeds to repeat this process in each of the next 20 years, scoring a double each time.

At the end of the 20 years, the 37.72% capital gains tax that you will have paid on the profits from each sale will have delivered about $9,716 to the government and you will be left with about $16,044.

If however, you invest in a single mutual fund that itself doubles 20 times during the 20 years, your dollar will grow to $1,048,576. If you redeem after the 20 years, you will pay a 37.72% tax of roughly $395,520. At that point, you have an investment portfolio worth $653,056.

This staggering difference (between $16,044 and $653,056) is the result of the deferral of tax payments.

Below are two graphs demonstrating the effect of capital gains tax paid annually (A) compared to the deferral of tax payments (B). The initial investment made is the same in both cases.

Nothing illustrates the power of the buy-and-hold philosophy like the power of compound interest. Any investment style that advocates either buying or selling securities at certain price objectives is completely at odds with the proven performance of a buy-and-hold philosophy.

Unused RRSP contribution room is a lost opportunity. It could be easier than you think to find the money to use your contribution room and save on income taxes while growing your retirement savings.

To put the power of compounding to work for you, contact your professional financial advisor.

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