WInTeR 2013 A quARTeRlY eDuCATIOnAl neWsleTTeR fOR ClIenTs Of RBC DIReCT InvesTInG InC.

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In this issueMarket Outlook

Using stock options to generate income or protect your portfolio

New online resources – plus put options for registered accounts

President’s Message – A look back at 2012

Your 2013 TFSA contribution limit

On January 1, 2013, all Canadian residents 18 and older will receive additional contribution room for their Tax-Free Savings Accounts. Good news! This year, the amount is $5,500, an increase of $500 over last year. Take advantage of this extra tax-sheltered savings room today.

Start exploring the RBC Direct Investing Community todayThere are a lot of investment options out there for those looking to get started. One of the biggest hurdles facing self-directed investors is knowing where to begin. With thousands of stocks, mutual funds and exchange-traded funds to choose from, it can sometimes be challenging to generate investment ideas by yourself.

Now you’re not alone!In January 2013, we are launching the Beta version of the RBC Direct Investing™ Community† (the “Community”) – an online community unlike any in Canada. When you opt to become a member of the Community, you can connect with other like-minded investors.

As a Community member, you can share your thoughts and exchange ideas with other members in a secure online environment. Only RBC Direct Investing clients or RBC Online Banking clients with Practice Accounts can join†, and it’s completely free of charge.

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Ranked #1 in clientservice by Dalbarfor the 5th consecutive year∆

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You can compare your holdings with those of other investors who have similar goals, time horizons and appetites for risk. Members’ real identities and the dollar amounts of their portfolios are never disclosed. Only percentage holdings of securities are visible to other members of the Community.

Have a question about a specific investing strategy or want to find out other members’ views on where interest rates are headed? Simply throw your question out to the Community in our Forums and see what your fellow investors think.

As you gain experience, or if you’re already an accomplished investor, you’ll have a valuable opportunity to share your knowledge and help others succeed.

Participate knowing your real identity will never be disclosedOnly account holders have access to and are able to see the dollar values of their own investment accounts (figure 1). Other Community members are able to see only your “public” profile (figure 2), which includes information like your level of investing experience and your investing interests along with percentage weights of your portfolio holdings for any goals that you add to your profile in the Community. Other members cannot see your real name, the number of shares/units in your portfolio or the dollar values of your holdings.

Figure 1

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Here’s a quick tour of some of the areas you can explore in the Community.

Track your progress towards your goalsTo join the Community, you’ll need at least one goal that you can track and compare with the goals of other members. If you do not have a goal yet, you can create one using our online goal-setting tool. Each of your goals will be linked to one or more real accounts or Practice Accounts.

Visit the Investing page to see your holdings and the progress you’ve made to-date towards your goals. For longer-term or larger goals, we make it easier for you to see your progress by dividing each goal up into annual targets.

Compare your holdings with those of other Community membersOne of the most innovative features of the RBC Direct Investing Community is the Universe (Figure 3). Here you can see how your investments compare with the investments of others. This page gives you a bird’s-eye view of the portfolios of each investor in the Community, plotted on a risk/return grid.

Similar to online maps, you can click on any area to zoom in to see the number of goals (portfolios) in that area. You can zoom in even further to view individual goals, including the goal details and portfolio performance of other members of the Community.

From each individual goal, you can navigate to its owner’s public profile page, where you’ll find the weighting of each holding in the portfolio that’s linked to that goal.

Or, you may do a side-by-side comparison of your goals and performance with any other goal in the Universe. It’s a great way to learn from investors who have similar profiles to your own. You can refine your investment strategy, uncover potential investment ideas and manage your own portfolio with more confidence. Dollar values and the real identity of Community members are never disclosed, so everyone’s identity is protected.

Challenge yourself…On the Challenges page, you can participate in three different types of challenges: winner-take-all, eliminator-style or a group challenge.

Click on “Active Challenges” to see what challenges are currently underway, as well as how many days are left in the challenge and who else is participating.

Not all challenges are competitions; sometimes working in a group setting towards a common objective can be fun. Group challenges are challenges where all participants win by reaching the stated objective of the challenge.

To participate in a challenge, you can set up a Practice Account and then link a new goal to the Practice Account. That way you can compete and learn through participating in challenges without using a real account.

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Join the discussion See what other investors are talking about or share your thoughts on the Forums page.1 You can browse topics or post your questions and comments to engage and connect with other members of the Community. Members can start conversations on a variety of investment topics, such as retirement, saving for a child’s education or even a type of investment vehicle such as exchange-traded funds.

When browsing discussions, you can “like” or “dislike” posts and let others know whether you agree or disagree with the person’s posting. “Likes” help identify individuals whose posts are considered valuable by the Community.

On the Connections page, you can search for people who share your investing interests. Click on the user’s name, and you’ll be taken to their public profile, where you can see that user’s goals and portfolio details. You can also choose to “follow” other members of the Community whose investment goals or interests are interesting to you.

Learning doesn’t have to be hardThe Learning page offers members of the Community investment knowledge in easily digestible snippets, including tips of the week, terms of the day, case studies and more.

You’ll regularly find new polls that you can participate in, to share your thoughts on key financial and economic issues and see how others feel about those issues.

New to investing? Here’s how the Community can help youfor people who are still getting to know their way around the world of investing, the Community is a great place to:

Browse the Universe of portfolios added to the Community by members in order to generate potential investment ideas

Compare the performance of your portfolio (real or practice) to the performance of other Community members’ portfolios

learn new investing terms, concepts and approaches from other Community members

Post questions and learn from people who have been in your shoes

Start exploring today!Joining the RBC Direct Investing Community is easy, and it’s completely free of charge. log into the online investing site or into your Practice Account. from there, you can select the Community tab for complete details on how to join.

Share your wealth of knowledge to help others succeedno one is born a successful investor. Good investors acquire knowledge and skills over time. If you are a seasoned investor, why not share your unique knowledge and the lessons you’ve learned with those who are just starting out? A single insight could really help beginners learn a key principle or skill needed to successfully manage their investments.

Sign up for eDocuments notificationsnow you can select to have notifications sent to your personal email box when your eDocuments (account statement(s), trade confirmations and required offering documents) are available. All you need to do is provide us with the email address you want the notifications to go to through the RBC Direct Investing online investing site.

simply sign into the online investing site and select the “edit Profile” link in the top right-hand corner, and from there select the “My Email Address and Preferences” link. On the My Email Address and Preferences page, provide us with your email address and your email notification preferences. You can update your email address and your preferences at any time.

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Market OutlookProvided by RBC Global Asset Management Inc. on December 14, 2012

Progress has been made in the global economic recovery and the probabilities of extreme scenarios – a deep recession in the U.S. and a break-up of the Eurozone – are greatly diminished. Policymakers deserve some of the credit for this after engaging in aggressive restorative efforts. The U.S. economy, in particular, is transforming at an accelerating rate. Private-sector deleveraging appears to have come to an end, paving the way for greater consumer spending. The housing market is reviving thanks to excellent affordability, and fading policy uncertainty could lead to renewed business investment. More than ever, there is a credible, if still lengthy, path back to something resembling a normal economy. The road ahead is bumpier elsewhere around the world, but there too are hints of renewed growth.

Global growth stabilizes The global economy bottomed in late summer and has since been staging a cautious comeback. Imbalances are improving, potentially bolstering growth, and the seasonal pattern of the past three years argues for economic strengthening through the winter. That said, there are a number of factors that continue to diminish global growth, most of which were brought on by the financial crisis. These include deleveraging, risk aversion and policy uncertainty. Some of these are finally settling down, but none are entirely off the radar screen. The Eurozone is already in recession, and the risk of contraction remains significant in the U.K. and Japan. In the U.S., however, recession odds remain contained.

Emerging-market economies are staging a tentative recovery in line with the global economy. This recovery is important for all regions, as emerging-market nations now represent an astonishing half of the global economy and three-quarters of world growth. China alone represents 32% of global economic growth, making it the single most important contributor. Recent economic data in China confirms a cautious recovery.

The much talked-about U.S. fiscal cliff refers to the sudden expiry of large tax cuts and stimulus programs at the stroke of midnight on New Year’s Eve. If not averted, this could chop as much as three to four percentage points from 2013 GDP. Politicians are knee-deep in negotiations and we will continue to see conflicting headlines over the next few

weeks. While we believe that politicians will likely fall short of a full fiscal fix, they should achieve enough to ensure that the full brunt of the fiscal cliff does not hit.

Over the past six months, Europe’s crisis has eased thanks to important progress on a number of fronts. While progress is occurring, the rate of change feels like it is slowing on some key issues, and there is a distinct risk that the market again grows impatient. Policymakers are feeling self-satisfied, having temporarily tamed markets. Spain continues to waffle on its bailout request, and tensions are growing over the extent of the banking union. Another round of market distress may be required to get policymakers serious again. Our expectations for Europe remain the same: the Eurozone will stick together, no major bank will fail, and no large country will default on its debt. All the same, Europe remains a substantial risk to the global economy.

U.S. dollar remains attractiveWe believe that tectonic shifts in favour of the U.S. dollar are under way. These include longer-term factors such as improvement in the U.S. current-account deficit, in part because of new sources of domestic energy; valuations; and demographics. Shorter-term factors bolstering the greenback include the increased attractiveness of U.S. equities, less easy monetary policy and the U.S. dollar’s safe-haven qualities. The long-term factors will assert themselves as time progresses and contribute to U.S. dollar strength versus most major currencies. Despite lower tail risks in Europe following the actions of the ECB, our least favoured currency is the euro, which we expect will be weighed down by a longer and deeper European recession.

Low short rates and contained inflationPolicymakers have certainly helped the economy with their aggressive actions as central banks continue to deliver stimulus. In the most recent quarter, the European Central Bank introduced a program to purchase government bonds and the U.S. Federal Reserve introduced a third round of quantitative easing (QE3). With central bankers largely focused on delivering more stimulus, policy rates should remain extremely low for several more years.

Inflation remains fairly tame around the world, even sliding a little lower in recent months. Commodity prices

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appear to have stabilized and seemingly decoupled from recent quantitative easing. We expect normal to slightly below-normal inflation across the developed world. It is a similar story among emerging markets, though the definition of normal inflation varies substantially by country. Over the long run, there are both upside and downside risks to inflation. Given that central bankers are tilting their focus away from inflation, we believe it is more likely that inflation will trend higher rather than lower.

Bond yields remain depressed, but pressure is mountingPersistently low policy rates, combined with unorthodox monetary stimulus, should continue to depress long-term bond yields. Other factors, such as contained inflation, elevated risk aversion and slow economic growth, are also consistent with low bond yields. However, as the economic backdrop improves, bond yields should start drifting higher. In this scenario, as we move past some of the tail risks to the recovery, investors will begin to demand a positive real return on bonds, putting upward pressure on bond yields. At that point, the unorthodox monetary policy that has been anchoring bond yields near historic lows may no longer be necessary, allowing yields to move much closer to fair value.

Earnings growth slowing, but valuations remain supportiveThe headwinds facing the global economic recovery have played an especially large role in the tone and direction of equity markets over the past few years. Threats to the recovery have kept valuations persistently low, even as corporate profits continued to post strong growth. The past quarter has been no exception. Global equity markets have bounced around over the past few months as uncertainty regarding the fiscal cliff, the Eurozone crisis and China’s growth potential has moved firmly back into focus.

With earnings growth slowing in recent months, the stock market has drawn its strength from rising valuations. Despite this recent improvement in price-earnings ratios,

global equity markets continue to trade below fair value. For the stock market to move sustainably higher, investor confidence is essential to further gains in valuations. Should we achieve meaningful clarity on the direction of the economy in 2013, there is pent-up demand for risk assets which, when unleashed, could push valuations substantially higher.

Emerging-market equities peaked in April 2011 and have since drifted down in price and relative to the trend of developed markets. Sentiment towards emerging markets is poor, owing to a string of disappointing GDP growth numbers. However, it is important to recognize that while emerging economies may be slowing, they continue to contribute the bulk of global growth. As developed-market growth stabilizes and emerging markets accelerate, equities in some of the fastest-growing countries may be poised to outperform.

Increasing equity overweight, with a bias toward emerging marketsThe 10-year trailing relative returns for stocks over bonds reached the lowest level in the past seventy-five years in March 2009. While the relative return of stocks has rebounded from the depths of the financial crisis, this relationship remains far below average and equity markets may be in the early stages of a long period of superior performance. We continue to overweight equities, recognizing this long-term potential for stocks, as well as their attractive valuations. Following a recent correction, we added to this position. We sourced the funds from cash and maintained our underweight in bonds. For a balanced global investor, we recommend an asset mix of 60.0% equities (versus a neutral level of 55%), 35% bonds (versus a neutral level of 40%) with a balance of 5.0% cash.

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The complete RBC Investment Strategy Committee’s Global Investment Outlook, including the recommended asset mix by investor profiles and the definitions of the investor profiles, can be found on the Market Insight page under the Markets tab on the RBC Direct Investing site.

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Using stock options to generate income or protect your portfolioA flexible way of generating income – or hedging against a potential stock price decline – is through the use of stock options. For investors who know how to minimize the potential risks, options can be an effective way to generate returns in a flat market, potentially acquire stocks for less than their current market value and decrease portfolio volatility. Before you begin options trading, it’s important to be fully aware of the risks involved so you can invest with confidence.

The basics of buying optionsAn option is a contract that allows the holder to buy or sell an underlying security at a given price. One option typically gives you the right to buy or sell 100 shares of a stock.

There are two main types of options:

n Calls. When you buy a call option, you get the right (but not the obligation) to buy a stock at a predetermined price by a specified date.

n Puts. Buying a put option gives you the right (but not the obligation) to sell a stock at a predetermined price by a specified date.

In either case, you pay a certain amount of money (the premium) to the person selling the option, who is known as the options writer. If you choose to exercise your option, the writer has to sell or buy the specified shares at the predetermined price, also known as the strike price.

Two popular ways to use optionsOptions are a flexible tool with a variety of uses. Here are two options-based strategies you may want to consider.

Generating income. You can write (sell) call options on stocks that you own. In return for the right to buy your shares at a specified price by a specified date, the option buyer will pay you a premium. This money is yours to keep, regardless of whether or not the option is exercised. Keep in mind, however, that if the buyer exercises the options or you are auto-exercised, you will be required to sell your stock.

Options as “insurance.” If you think the price of a stock you own may go down, you can purchase a put option on that stock. If the price falls below the strike price, you can exercise your option. The option writer is obligated to buy your stock at that price, regardless of the market price. This way, you limit your loss to the value of the strike price plus any commission costs. Alternatively, you can sell your option to help offset the decrease in the price of the stock. What

happens if the share price goes up? You can simply let the option expire and continue to benefit from the price increase.

Understanding the risksOptions offer a known risk to buyers. As an option buyer, the most you can lose is the price you paid for that option, plus any commission costs. If you choose not to exercise the option you purchased, it will be auto-exercised if the contract is in the money or expires worthless.

Option writers, on the other hand, can face potentially unlimited risk if they do not own the underlying shares.

Getting startedTo buy and sell options, you’ll need to have an options-enabled account, which allows you to trade on margin. You can learn more about options by visiting the Options page under the Investment Products tab. If you want to get started, just fill in and mail the Options Agreement form to RBC Direct Investing. For non-registered accounts, you will also need to apply for margin. To find this form, click the “Apply for Options Trading” link found under the “Self Service” menu on the right-hand side of the Options page located under the Trade tab. If you prefer, you can get risk-free experience trading options in an RBC Practice Account.

New online resources – plus put options for registered accountsWe’ve introduced new tools and opportunities for investors eager to make the most of trading options.

We have launched the Morningstar‡ Options Income Generator, a list of option opportunities selected by Morningstar for their ability to generate additional income. The Morningstar Options Income Generator complements our existing suite of Morningstar stock, exchange-traded funds and mutual fund research available to all RBC Direct Investing clients.

As well, you can now buy put options in your registered accounts without holding the underlying security, allowing you to use them as insurance for your registered portfolio and downside protection for your equity investments. You need to have an options-enabled registered account to purchase put options for your registered investments. To learn more, visit the Options page under the Investment Products tab.

RBC Direct Investing Inc.*, RBC Global Asset Management Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. RBC Direct Investing Inc. does not provide investment advice or recommendations regarding the purchase or sale of any securities. Investors are responsible for their own investment decisions. RBC Direct Investing is a business name used by RBC Direct Investing Inc. ® / ™ Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada. Used under licence. © Copyright 2012. All rights reserved. ‡ All other trademarks are the property of their respective owner(s).* Member–Canadian Investor Protection Fund.Information supplied by RBC Global Asset Management Inc. (RBC GAM) has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, RBC Direct Investing Inc., their affiliates or any other person as to the accuracy, completeness or correctness of information obtained from third parties. Opinions of RBC GAM constitute its judgment as of December 14, 2012, are subject to change without notice and are provided in good faith but without responsibility for any errors or omissions contained herein.∆ RBC Direct Investing was ranked number one by Dalbar Inc. in 2007, 2008, 2009, 2010 and 2011. The annual Dalbar Direct Brokerage Service Award rankings are based on evaluations made over the

calendar year, measuring a company’s quality of performance in product knowledge, professionalism and their ability to provide value-added service. † Specific terms and conditions apply for membership of the RBC Direct Investing Community.1 Individuals registered with or employed by an organization that is subject to the professional practices of IIROC, the MFDA or a provincial securities regulator, or who operate independently as a financial

planner or who are licensed or registered to provide financial advice cannot post comments, material or any other information on the site but can utilize the remaining features for personal use.2 RBC Mobile is operated by Royal Bank of Canada, RBC Direct Investing Inc. and RBC Dominion Securities Inc.The information contained herein has been obtained from sources believed to be reliable at the time obtained, but neither RBC Direct Investing Inc. nor its employees, agents or information suppliers can guarantee its accuracy or completeness. This publication is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This publication is furnished on the basis and understanding that neither RBC Direct Investing Inc. nor its employees, agents or information suppliers is to be under any responsibility of liability whatsoever in respect thereof. The inventories of RBC Direct Investing Inc. may from time to time include securities mentioned herein. Using borrowed money to finance the purchase of securities involves greater risk than using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.For more information on our products or services, or to complete an application, drop by any RBC Royal Bank branch or visit our website at www.rbcdirectinvesting.com.For past issues of our newsletter, go to www.rbcdirectinvesting.com/newsletter. For account-specific inquiries, call us toll-free at 1-800-769-2560. VPS80863 40922 (12/2012)

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President’s message

A look back at 2012 With 2013 newly upon us, it’s a great time to look back on the events of 2012. During the year we delivered a number of enhancements to make managing your investments even easier and more cost-effective for you, including the simplification of our fees and commissions.

Some of the most exciting developments this year came in the digital space. We introduced the ability to make pre-authorized contributions online and offered our clients the convenience of trading through the enhanced RBC Mobile app2, which allows you to access your RBC Direct Investing accounts from almost anywhere.

We also made great strides in research and analysis. A robust suite of stock, exchange-traded fund and options research content from Morningstar was introduced to complement the mutual fund research already available. Plus, with the launch of Lifestyle Stock Screeners developed by Morningstar and our upgrade to the Interactive Charting tool, you have even more resources to help you generate investment ideas and make informed decisions.

As I write this, we’re preparing for the launch of the RBC Direct Investing Community, which will enable like-minded investors to connect with each other to share thoughts and exchange ideas. We are thrilled to pioneer this exciting new space where clients can connect with each other.

Our persistent commitment to our clients didn’t go unnoticed, and we were proud to receive Dalbar Inc.’s Direct Brokerage Service Award last January for the fifth consecutive year.

For 2013, the team here at RBC Direct Investing remains committed to delivering an exceptional investing experience. Stay tuned for details on innovative new additions.

Thank you for choosing RBC Direct Investing. I wish you great success in 2013.

Sincerely,

Jason Storsley, CFA President and CEO, RBC Direct Investing Inc.