It’s been quite a while since our last book review and giveaway, but lets get it going again with a great personal finance book written by the popular Globe and Mail columnist, Rob Carrick.  The title is a bit long, but descriptive to the overall theme of the book.  The book is titled “Rob Carrick’s Guide to What’s Good Bad and Downright Awful in Canadian Investments Today.”

About the Author:

According to the book:

Rob Carrick is one of Canada’s most widely read and best-respected financial experts, with two decades of experience as a business and economics reporter and commentator.  Carrick worked on both Bay Street and Parliament Hill before becoming the personal finance columnist for The Globe and Mail ten years ago.

About the Book

As you can probably conclude from the book title, this book focuses on the Canadian investment industry and does a great job explaining how the industry works in a brutally honest fashion.  Although this book is meant for the beginner to intermediate investor, there is something for everyone in this book.

Did you know that when you buy mutual funds from a discount broker that they keep the trailer fee even though they didn’t offer any advice (except Questrade)?  Or the traits of an advisor that you should look out for?  Or even mutual funds that actually provide value?  Those are just a few tid bits of information that I gathered from the book.

The topic areas covered in the book include:

1. Getting off to a good start – how to get started as an investor, some common mistakes.
2. Mutual Funds – how fund fees work, and lists of good and bad mutual funds.
3. Navigating the Stock Market – how to build a simple portfolio without mutual funds, dividend investing, discount brokers, ETFs.
4. Bonds, GICs and other conservative stuff – fixed income rip offs, ETF alternatives, principal protected notes, high yield bonds.
5. Do-it-yourself investing – reasons to use a discount broker along with a listing of the top 3, investments that go great with a discount broker account and online resources for investors.
6. Investment advisors – traits of good and bad adivsors, interview questions, and steps to take if an advisor has wronged you.
7. Information, please – recommended websites/newsletters/calculators for investing.

Final Thoughts

Overall, I enjoyed this book and would consider it a must read for personal finance enthusiasts, especially those just starting out on their journey.

Want a Free Copy?

The book publisher was generous in offering Million Dollar Journey readers the chance to win a free copy of the book.  The details are below:

1. Follow our new Facebook page by clicking “Like” on the top of this page. (+1 entry)
2. Leave a comment in this post. (+1 entry)

• Only one comment entry per person (valid email addresses only please – privacy policy).
• Only those with a North American mailing address may enter (publisher rules, sorry).
• Contest will end Fri 5pm EST Sept 10, 2010 and the winner, drawn randomly from all entries, contacted shortly after!

This is a column by regular contributor Clark.

The earlier parts of the bond series dealt with the basic types of bonds and their risks and suitability. This part will begin a sub-series on corporate bonds.

As mentioned in the first part of the series, corporate bonds are issued by companies to gather funds for their business. With thousands of companies issuing bonds, where does one start to make the list smaller?

Credit Rating Agencies

Similar to credit reporting bureaus that keep track of a consumer’s credit history, there are Nationally (US) Recognized Statistical Rating Organizations such as DBRS (short for Dominion Bond Rating Service), Moody’s, Standard and Poor’s(the S&P Indices fame) and Fitch Ratings that issue credit ratings for companies. These agencies offer a rating system to aid investors in determining the risks associated with investing in any company. Debt could be secured or unsecured and there are specific ratings for short-term debt, long-term debt, preferred stock, etc. A glance at the long-term credit ratings of a company (that also considers assets or collateral needed in case of default) would show the company’s ability to fulfill its debt obligations and credit worthiness. It must be noted that credit ratings are not meant as alerts to buy, hold or sell; they are just a tool to assess a company’s capacity to pay back debt.

Foreign Currency Debt

Companies may borrow from lenders inside and/or outside the country (for example, Canadian companies may make use of US banks and vice versa). As would be obvious, borrowing from foreign lenders comes with currency rate fluctuations. Repaying a local (as in country) lender is straightforward – if the company has the money and willing to repay, then the debt is paid. But, in the case of foreign currency debt, companies would have to consider currency rates and decide if it is lucrative to repay debt at that existing currency rate or watch market forecasts and calculate if they would be in better health by holding off until when they think the exchange rate will be stronger (they may also invest overseas at such a time). Foreign currency debt throws another variable into the mix but thankfully, agencies evaluate an organization’s ability to repay debts in local and foreign currencies. If the organization has foreign currency debt but does not have sufficient foreign currency reserves, then their rating may be lower.

Corporate Credit Rating

Corporate credit ratings range from the highest quality (best) to junk level (worst). Agencies use different designations but in general, long-term ratings are denoted by the letters AAA (triple A), which is the best credit rating (meaning low credit risk) and C or D (based on the agency) is the worst (default level as in failing to meet obligations). There are subsets to the basic category, which might involve a “+” or “-” sign to indicate subclasses (again, varies based on the agency). For example, the Fitch Ratings use AAA, AA, AA, BBB for investment grade and BB, B, CCC, CC, C, D and NR (not rated) for non-investment grade bonds. A good credit rating helps a corporation attract new partners or retail investors, apply for an increase to their line of credit, or sell their business.

Sovereign Credit Rating

A sovereign credit rating provides information about a country’s ability to provide a stable and secure investment market. This rating is contingent on a country’s economic status, market transparency, foreign investments, currency (local and foreign) reserves, and political stability to name a few. Potential investors can analyze the country-level risk associated with the company they are looking at and arrive at their decision. A sovereign rating is critical, since it will boost the country’s prospects in terms of pulling in foreign investments and assisting in the growth of the economy.

In the next part, we’ll look at some metrics worth knowing about when purchasing corporate bonds.

About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. – Laurence J. Peter

Our last article explained why the economy is not relevant to investing – short term. If you want to forecast the stock market this year or next year, the economy is essentially irrelevant – because the stock market forecasts the economy, not the other way around.

More surprising for investors, however, is that even the long term growth of the economy is not relevant to investing!

Most investors mistakenly believe that, over the long run, stock prices rise because of growth in profits brought on by the economy. Specifically, the belief is that the long run stock market growth = economic growth + change in multiple (normally expressed as P/E, or Price/Earnings multiple).

This is widely believed, even though it is obviously false when you look at the numbers! The actual stock market growth in most countries is many times the economic growth long term (see chart below).

A related “conventional wisdom” is that countries that have a strong economy will have a strong stock market. This sounds perfectly logical – it’s just not true. In fact, the opposite may be true!

For example, many news stories gloat about the high growth of the economy of China at about 10%/year. This is used to claim that investing in China will be a good investment. Recently, other news stories speculate that the US and Canada may have slower growth for a few years, and this is used to suggest that the stock market returns may also be lower.

However, in-depth studies comparing countries with high growth economies show this does NOT translate to higher stock market growth. In fact, if anything the opposite is true!

The most in-depth study we have seen is in the classic investment book on global stock markets “Triumph of the Optimists”, Dimson, Marsh & Staunton. They analyzed the correlation of GDP growth to the stock market in 17 major countries from 1900-2000 and found:

Correlation of GDP Growth to Stock Market

Note that “negative correlation” means that they tend to move in opposite directions – higher GDP growth generally resulted in lower stock market growth, and vice versa. Higher GDP does NOT mean it is a better place to invest.

Their conclusion:

“Since 1900, low-growth economies have superior stock market performance. Historically, buying into equity markets with a high GDP growth rate has given a return that is below the return of markets with a low GDP growth rate. There is no apparent relationship between equity returns and GDP growth.” – Global Investment Returns Yearbook 2005, Dimson, Marsh and Staunton.

Figure:  Higher stock markets generally were in countries with lower GDP growth in their economy. Source: “Triumph of the Optimists”, Dimson, Marsh & Staunton.

In another study, Jeremy Siegel compared GDP growth to stock markets from 1970-97 and came to the same conclusion:

Correlation of GDP Growth to Stock Market

Jeremy Siegel also did a 107-year study from 1900-2006 with the same conclusion:

“The results are striking. Real GDP growth is negatively correlated with stock market returns. That is, higher economic growth in individual countries is associated with lower returns to equity investors.” – Jeremy Siegel, Stocks for the Long Run.

Ken Fisher (star fund manager and columnist for Forbes) in his myth-busting book, “The Only Three Questions You Need to Ask” explains:

“A major error investors make in foreign investing – developed countries as well as emerging markets – is assuming a country with a growing GDP must have good stock returns. By the same logic, a flat or negative GDP is often assumed to lead to poor stock returns. This easily debunked Question One myth has been a major cause for investor interest in China over the past few years.”

This myth is popular because people like to have very simple methods of understanding what is going on and because human beings are wired to see correlations whether or not they exist. Economic data is widely covered in the news with many news stories trying to relate it to the stock market. For investors that do not have an in-depth knowledge of stock markets and market history, the economy provides a simple way to talk about the market in broad generalities.

Bottom line: Countries with lower GDP growth generally have better stock markets.

The economy and the stock market are different like “chalk and cheese”. The reasons that slower growing economies generally have higher stock market growth are not fully understood, but here are the most likely reasons:

1. Expectations of the economy are built into prices of stocks:

Jeremy Siegel believes it is because the higher economic growth is built into stock market prices ahead of time and that it is often overly-optimistic. The price investors are willing to pay for a stock or mutual fund includes their expectations for how good an investment it will be. Therefore, investments in countries or sectors that are expected to perform well will tend to be at over-valued – which means their future returns will likely be lower.

2. Companies have many ways to grow profits:

Our opinion is that companies are able to adjust their operations to continue to grow their profits, whether or not the economy is growing strongly. Management is focused on annual targets to grow their profits and can do this in many ways – cost cutting, more efficient systems, new products, new technology, selling unprofitable divisions, buying competitors, gaining customers from competitors, new marketing/advertising programs – or replacing the management. Management is expected to grow profits regardless of the economy.

3.The economy is based on gross and the stock market is 15 times net:

As an accountant and a finance guy, it is easier to see why they are not a proper comparison. The economy is related to the “total output” of the country, which includes the sales or income of companies (and governments, etc.), while the stock market is normally based on a multiple of the profits or bottom line of companies (typically 15 times).

A comparison to your personal budget could be that the economy is like your salary (your gross), while the stock market is like 15 times the money you have saved/invested or have left over at the end of the month (your net).

When you think of them this way, you can see why they may grow completely differently for many reasons. For example, if you get a 10% raise, does that mean you will have 10% more money left over at the end of the month? Maybe/maybe not. If you reduce an expense (pay off a loan or buy a cheaper car), your bottom line soars (especially when you multiply it by 15), even though your salary/income did not change.

This is why the formula is false: stock market growth (15 times net) = economic growth (1 times gross) +/- change in multiple. You can’t compare 1 times gross to 15 times net!

4.The stock market is linked to the total of all shares, not to the average price per share.

Jeremy Siegel also believes that “economic growth influences aggregate earnings and dividends favourably, economic growth does not necessarily increase the growth of per share earnings or dividends. This is because increased growth requires capital expenditures…” (Stocks for the Long Run). He believes that it costs money to support higher growth. This is either borrowed, which lowers profits, or financed by issuing new shares, which lowers the profit per share.

5.The economy and the stock market are like “chalk and cheese”.

Companies and the economy are just different. For example:

• Ken Fisher, “The Only Three Questions You Need to Ask” explains: “Prices are determined by shifts in supply and demand, which may or may not parallel whether GDP growth is strong, weak, or nonexistent.”
• Some factors affect them differently. For example, high unemployment is clearly bad for the economy, but is arguably good for companies in the stock market. It means that some consumers are less likely to spend money, but on the upside, it also means that there is an available workforce, less pressure to increase wages, and that they are more likely to keep their best employees.
• The stock market is not the same companies over time. Obsolete or unprofitable companies are replaced by more profitable, innovative companies, especially in a slower economy.

Conclusion

The economy is not really relevant to stock market investing – short term or long term.

I realize this belief is very ingrained in the thinking of many investors, who may find it difficult to understand the stock market without thinking of the economy. However, a growing body of evidence continually confirms that economic growth is not necessary for good stock market returns – and in fact lower economic growth may promote good stock market returns.

The stock market does what it does – grows significantly long term with 1 or 2 bear markets per decade – generally regardless of what happens in the economy.

If you are an investor, your limited time is best spent on things that are definitely relevant, such as understanding stock market history and researching the quality of your investments. Forecasts and conjecture about the short or long term economic outlook or growth rates for the economy, sector or country may amount to just “market noise” or distraction to be avoided in your investment decisions.

Reader Poll

Since the reasons that slower growing economies tend to have faster growing stock markets is not fully understood, which of the 5 explanations do you believe is correct (or do you still believe that growth of the economy is necessary for the stock market to grow)?

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

Welcome to the Million Dollar Journey August 2010 Net Worth Update - RRSP Contribution Edition.

It’s a little past halfway through the year and I finally got my act together and made our RRSP contributions.  I figured since our cash savings was buiding up, we might as well put it to some use.  The bright side is that we’ll get the tax deduction for 2010 tax year, but the other side is that I’ll need to find a place to invest the cash.  In total, we contributed $23,000 in our combined RRSP’s which is pretty close to our contribution limit for the year.

What do you typically do with cash sitting in an investment account?  Do you simply put it in a money market fund?  Or perhaps short term bonds?

I haven’t been doing too much buying lately, with most of the action happening within the RESP acccount.  If you recall, the RESP account is indexed with the TD e-Series set of low cost mutal funds.  As it’s a common theme, it was close to 40% cash, but I managed to transfer some to the various funds during the correction in July.  I’ll be moving more of the cash with every market dip going foward.

In terms of savings, besides the contributions, our cash savings was stronger than usual as we finally collected on some long overdue receivables.

On to the numbers:

Assets: $ 537,350 (+1.02%)

• Cash: $4,500 (+0.00%)
• Savings: $35,000.00 (-30.00%)
• Registered/Retirement Investment Accounts (RRSP): $98,000.00 (+0.26%)
• Tax Free Savings Accounts (TFSA):  $19,700 (-0.47%)
• Defined Benefit Pension: $30,800.00 (+1.15%)
• Non-Registered Investment Accounts: $11,600.00 (-5.69%)
• Smith Manoeuvre Investment Account: $54,500.00 (-0.91%)
• Principal Residence: $283,250 (+0.00%) (purchase price adjusted for inflation)

Liabilities: $66,400.00 (-2.64%)

• Principal Residence Mortgage (readvanceable): $11,800.00 (-14.49%)
• Investment LOC balance: $54,600 (+0.37%)

Total Net Worth: ~$470,950.00(+1.56%)

• Started 2010 with Net Worth: $399,600.00
• Year to Date Gain/Loss: +17.86%

Some quick notes and explanations to net worth questions I get often:

The Cash

The $4,500 cash are held in chequing accounts to meet the minimum balance so that we pay no fees (accounting for regular bill payments). Yes, we do hold no fee accounts also, but I find value in having an account with a full service bank as the relationship with a banker can prove useful.

Savings

Our savings accounts are held with PC Financial and ING Direct. We usually hold a fair bit of cash in case “something” comes up. The “something” can be anything that requires cash such as an investment opportunity that requires quick cash or maybe an emergency car/home repair.  We also need cash to cover any future tax liabilities.

Real Estate

Our real estate holdings consist of a primary residence plus a rental property. The value of the principal residence remains valued at the purchase price (+inflation) despite significant appreciation in the local real estate market.

Pension

The pension amount listed above is the value of both of our defined benefit pension plans.  I basically take the semi annual statement and add the contribution amounts (not including employer matching) on a monthly basis.

Stock Broker Accounts

Another common question is which discount broker do I use?   We actually have accounts with multiple institutions.  I’m hoping to reduce the number of accounts that we hold in the near future.  Here is a review of some of the more popular online stock brokers.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

Flipping Houses for Profit @ in the Archives (1 year ago today)

Is the Market Headed for a Rollover Accident? @ Balance Junkie

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Free ACB & Capital Gains Tracker in Excel @ Canadian Capitalist

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Catching a falling knife (continued) – RIMM & BP @ Intelligent Speculator

The value of advice @ Thicken My Wallet

The Costs of an In-Ground Pool @ Michael James on Money

budgeting sustainably for real life @ The Money Gardener

Interview with the Secretary General of Luxembourg for Finance @ Where Does All My Money Go

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Copyright 2010 MillionDollarJourney – All Rights Reserved

This is written by our resident real estate guru Rachelle.

In many of my past columns I have discussed the problems of buying real estate in our current market. I have mostly decried that current prices, even at today’s interest rates, are too high to make a profit. I have also warned of the dangers of investing without including proper expenses such as property management, vacancy and maintenance expenses. I have said that it is possible to find properties that can be considered investments but the search will be long and arduous especially if you are buying in the larger centres such as Toronto.

Many investors want to invest in real estate but do not want to deal with the problems associated with owning property directly. Real estate is far from passive. Many people, FrugalTrader included, have bought and then subsequently sold their properties because of this. Let’s face it… you work, you’re tired and an extra rental house or two requires working some more, on evenings and weekends, when you’d rather be watching a movie and having a beer. The other problem with the extra work is that you’d make more at a minimum wage job. All in all it’s not worth it for many.

The Exit of Experienced Investors

In the last few year there has been an exodus of small landlords cashing out. I had one gentleman, a landlord for 20 years, tell me that it just didn’t make sense anymore. He could sell his house for $600,000 plus or rent it for $1600 per month with all the risks associated with bad tenants. There just wasn’t enough profit in the business and too much appreciation of the properties to maintain a rent/price ratio. For many longtime landlords this was the equivalent of winning a lottery. The skewing of the rent/value ratio is a sign of a out of balance real estate market.

The REIT Solution

One solution I hear over and over is why bother with buying my own properties when I can just buy a REIT? Usually this would work. You could profit from the asset class with out having to actually own and maintain and rent anything. You could watch your movies and have your beer in relative peace, however, there are problems with this strategy.

The REIT Problem

One of the major problems when buying REIT’s is the lack of control. When buying you make a number of assumptions that you may not be aware of such as the value of the assets they hold and the benefits of professional management. When you buy a share, that money is used to purchase real estate assets and they use the money generated by those assets to pay you a distribution. You have to trust that they are doing a good job and are not using Hollywood Accounting.

REIT’s Are Not Protected From The Real Estate Market

If you consider the indicators and the recent news that there are significant problems with the valuation of real estate in today’s market, you also have to consider that REIT’s will also take a severe hit if valuations of real property fall. I had lunch with a mortgage broker who works for a major pension fund a few weeks ago and she was saying that it is common place for REIT’s to have a 75% loan to value ratio on their properties. Some of these REIT’s claim they have a much lower loan to value ratio of 50%. She sees their mortgages so I’m inclined to believe her.

Lemming Behaviour affects the Stock Market

Even REITs with great, stable portfolios will not escape a real estate market adjustments. Once market sentiment turns and the fear takes hold, prices on REIT shares will go down. If the value of their assets fall then their ability to remain liquid and refinance will take a severe hit. Many industries are dependant on prices of real estate going up. Employment takes a hit along with building materials suppliers. The economy as a whole suffers.

Deleveraging

My very first property management job was in a multi res building that had changed hands 6 times as the real estate market deleveraged. As values fall companies must sell off assets to keep their loan to value ratios intact. Of course other potential buyers are also affected by the same market values and experience the same problems and a plummeting effect occurs. Lenders ask for more security as they suspect that prices may go down even further.

So Should You Buy A REIT?

Go ahead and buy if you think the real estate market fundamentals are healthy. If you think that current valuations of real property are too high, don’t buy REITs as an alternative…they’re just as vulnerable. They are listed on the stock market but the values of their assets are linked to the real estate markets. REITs are buying in the same real estate market as you are. They have even more pressure on them to buy than you do, every quarter they have to prove that they are wisely investing shareholders money, they can’t sit around with piles of cash even when they should.

What are your thoughts on current REIT valuations?  Would you buy at these levels?

About the Author: Rachelle specializes in renting property on behalf of landlords and is the blogger behind Landlord Rescue. She also works with investors to find good investments in Toronto and surrounding areas. Her passion is bringing multi res properties back from the brink and maximizing profitability. Check out some of her other real estate posts on MDJ.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

This is a column by regular contributor Clark.

This blog has recently featured a number of posts about real estate. I figured that a tenant’s perspective on the relationship would do justice. I have shared an apartment during my school days and currently rent one level of a house on my own. I’d like to list some points from my renting experience that I find make for a good, if not great, landlord-tenant relationship.

1) Promptness. From my side, this includes paying rent on time and reporting problems at the earliest. The landlord has duly issued a receipt each month and responded to problems swiftly. Due to my trust, sometimes, I drop off a check, forgo collecting the receipt immediately (it is usually the landlord who is busy on the phone or with someone else) and get it along with the next month’s receipt. Rent is due on the 1st of the month but due to holidays or landlord’s unavailability, once-in-a-while, I’ve paid it several days later too.

But, say, I make it a practice to pay it on the 5th of each month and the landlord does not object (since we have developed mutual trust); if we ever go to court for late payment, the landlord cannot use the original lease agreement that says “rent is due on the 1st of each month”, since an estoppel would prevent him from doing so. An estoppel would thwart the landlord (or tenant as the case may be) from going back on the position (collecting rent on the 5th) that he previously took, either by deed or silence. This is something both parties should be aware of, more so landlords with late payment issues.

2) Respect. I treat the property as my own and I say this in a good way. I maintain the place as though it were my own. Being a minimalist helps, since I don’t have clutter and the house is easier to clean.

3) Privacy. It is probably basic courtesy but I’ve never had my landlord knock on the door at unearthly hours as valid as the reason could be! When he has come unannounced, he has been apologetic and always had a good excuse.

4) Trust. There have been times when there were renovations occuring in the evenings. I waited a couple of days thinking that they may have had an emergency to attend to on those days and hence, were trying to finish the day’s quota at all costs. But, on the third day, there was some drilling going on and my patience ran out. Luckily, the landlord was around helping out with the work; I called him outside and explained that I did not sign up for what was happening and that it was starting to get irritating. He apologized and said that he will make sure that there was no noisy work after I got home and they would keep it to painting. He kept his promise. Maybe, we did not set terms explicitly or he took advantage of our good relationship. Either way, a little talk solved the issue and I’m sure it’ll pay dividends in many other cases too.

I realize that many landlord-tenant problems arise due to money-related issues but there are other factors that should be considered for a seamless stay. I haven’t covered situations such as unfair rent increases, abnormal restrictions, tenants fixing a problem on their own (against the agreement) since it happened on a weekend or the landlord was not immediately available, etc., as I do not recall any from experience.

If you’ve ever been a tenant, how was your experience? Do you have any stories or tips that would improve the experience for both parties?

About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

With the talks of the Canada Pension Plan Investment Board (CPPIB) bidding on the company Intoll for $3.2 billion, it got me curious to do more research on the deal.   InToll owns 30% of the Toronto toll highway 407 and 25% of a toll highway Westlink M7 in Sydney Australia.  The CPPIB interest in the company was based on their share of the ownership of the 407.

As I have family in Toronto, I tend to visit often and have traveled along the 407 quite a number of times, especially to and from Pearson Airport.   The 407 is a unique toll highway in that it’s 100% automated by electronic sensors/transponders and video cameras.  In other words, there’s no stopping required to pay for access like traditional toll highways.  They electronically track your travel at the access/exit points, and send you a bill at the end of the month.

While driving on the 407, often times I think about the amount of revenue the toll highway must generate if they are charging by the kilometer. What are these charges?  They charge per kilometer, a monthly transponder fee, and a video fee if the transponder isnt’ detected or not used.  These fees can also vary depending on the vehicle class.  For light vehicles, peak time travel varies between $0.201 and $0.2135 per km, add on a transponder fee of $2.50 per month, and a toll charge of $0.40 per trip.  Doesn’t sound like a lot, but to put it in perspective, over 170,000,000 KM’s were travelled in 2009, with over 900,000 transponders in circulation.  All of that with 2010 growing at an even greater pace.

Out of curiosity, I did some searching for revenue numbers and found that they had some presentations on their website.  In 2009, they had a little over $500,000,000 in revenues.  Sounds impressive, but it surely must be expensive running and maintaining a highway.  I mean, they have to pay for salaries, highway maintenance, a portion of police coverage, snow clearing and unreadable vehicles, let alone capital costs.  From the presentation, their earnings after expenses, but before interest, taxes and deprecation/amortization (EBITDA) in 2009 was around $400,000,000 (not counting capital costs).  Which makes their annual operating expenses around the $100,000,000 mark.

Knowing the earnings, lets look into valuation.  I’ve read that the $3.2 B bid was based on 80% highway 407 and 20% Westlink M7 highway, which means CPP is willing to pay $2.56B for 30% ownership of the 407. This brings the total valuation of the highway to $8.53B.  For this amount, they would be getting an infrastructure asset that returns a EBITDA of $400M which means CPP is paying approximately 21 times EBITDA (Price/EBITDA). 

With expansion and capital projects ongoing, investing in the 407 may be a growth investment that cash flows well, but at 21 times earnings, it is quite the premium.  However, there are high valued assets at play here, which means highway 407 most likely comes with a high book value.  What do you think?  Do you think CPPIB is paying too much for the highway?

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Copyright 2010 MillionDollarJourney – All Rights Reserved

It looks like the no-fee chequing account space is heating up with ING Direct being the newest player in the market.  ING has introduced a new online based chequing account, called “Thrive“, and is direct competition to PC Financial’s offering.

As a client of PC Financial since its inception, I must say that I’m a fan of the no-frills account. What I like is that I can write cheques without the fee of buying the cheque book and the bonus of not requiring a minimum balance.  Another bonus is the ability to transfer money to/from any other bank account (ie. other big 5 bank) without fees and the recent addition of Email Money Transfer ($1.50).  The downside, of course, is that since it’s an online operation, the lack of human/teller access can be inconvenient at times (like when getting a bank draft).

ING’s Thrive offers more or less the same features as a PC Financial account, but with noticeable differences as well.  For one, in order to make a deposit or withdrawal for free, the client will need to access an ATM within the Exchange Network, which is the network used for credit unions.  PC Financial, on the other hand, uses CIBC’s ATM network for their cash needs.  One feature that is quite innovative in the ING account is that they allow up to $250 in overdraft without interest or fees providing that it’s paid back within 30 days. Another feature that I really like about the ING account is free email money transfers where it costs $1.50/transfer with PC Financial or other institutions.

*Deposits/Withdrawals are free providing that their partner ATMs are used.  Otherwise, there is a fee based on the ATM machine used.

Overall, although there isn’t a big difference between the two competitors, it’s a great thing for consumers as they have another option for no fee banking.  The new ING chequing account will be a great addition for those who already have an ING savings account. Will I be switching from PC Financial to ING?  Probably not.  Although the free email money transfers (EMT) are appealing, I like the convenience of linking and transferring money to/from my other bank accounts with a couple mouse clicks.  I would be able to transfer out of my ING account for free via EMT but transferring money to the ING account electronically would be an issue.

What are your thoughts on the new ING Thrive Chequing Account?  Will you be switching?

Update: Readers have pointed out that cheques with the ING Thrive account are only free for the first book.  After which the cost is $10 for 20 cheques.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

This is a column by regular contributor Clark

Recently, a friend went overseas (the US) on a temporary assignment. He is a perennial last-minute income tax filer and so, I joked that the tax deadline in the US is two weeks before the Canadian one and that he might want to advance his last-minute rush to April 15. After his departure, I started to wonder about how Canadians working or living overseas are treated for income tax purposes and the curiosity has resulted in this post.

The term “residency” is not defined in the Canadian Income Tax Act but the Canada Revenue Agency publishes an interpretation bulletin that provides guidelines to help taxpayers determine their residency. In Canada, all residents are required to pay tax on their yearly worldwide income, whether they are citizens or landed immigrants. When a person goes overseas for study, job, vacation, or on part-vacation, part-work arrangement, they will have to determine their residency status based on their residential ties before filing their tax return.

Residential Ties

Residential ties include having a home in Canada, other property such as car, boat, furniture, lake-side cabin or cottage, a spouse or common law partner who lives in Canada, driver’s license, bank accounts, brokerage accounts, credit cards, health insurance with any province/territory and social ties in Canada. Based on these criteria, there are four types of “overseas Canadian residents”.

1) Factual Resident. If a person maintains significant residential ties to Canada while overseas for any reason, then they are considered as a Canadian resident for income tax purposes. However, if the person establishes residential ties in another country with which Canada has a tax treaty, then the person is considered as resident of that country and a deemed non-resident of Canada. As a factual resident, the tax-filer is treated as if they never left Canada and all the rules that apply to someone who lives in Canada all year are employed.

2) Deemed Resident. Members of the Canadian Forces, members of the Canadian Forces overseas school staff, government employees who are posted overseas, people working under a Canadian International Development Agency assistance program, dependent children of any of the first four categories, or persons exempt from tax on atleast 90% of their world income in the other country under an agreement or convention are considered as deemed residents. A deemed resident would report their worldwide income, claim all deductions and federal tax credits, and can apply for GST/HST credits. They would pay surtax instead of provincial/territorial tax and cannot claim any provincial/territorial tax credits. If they have business income from Canada, then they would pay provincial/territorial tax and can claim any related provincial/territorial credits.

3) Non-resident. If a person establishes permanent residence overseas and breaks their residential ties with Canada, then they become a non-resident. They are considered as an emigrant in the year they leave Canada and a non-resident in subsequent years. A non-resident would only have to report Canadian employment income, Canadian business income, taxable Canadian scholarships, grants and bursaries, and taxable capital gains from sale of Canadian property. If a non-resident has Canadian investment income, the tax payable is withheld before payment (to the non-resident) and this is usually the final tax obligation to Canada for that income. If the tax is not withheld, then the banking/brokerage institution should be informed that they are dealing with a non-resident account (investor’s responsibility).

4) Deemed Non-resident. A person who has residential ties with another country is considered a deemed non-resident of Canada if their ties with the other country have become such that they are considered a resident of that country under the tax treaty. Deemed non-residents fall under the same category as non-residents for income tax purposes.

Special Tax Credits

Factual residents and deemed residents can apply for tax credits such as foreign tax credit and overseas employment tax credit to reduce their taxes payable.

This post is just an overview and there are other scenarios/issues such as people working as missionaries, people who lived in Quebec before leaving Canada, eligibility for Canada Child Tax Benefit and Universal Child Tax Benefit based on the residency status, etc. Please refer to this Foreign Affairs and International Trade Canada page and browse the several links included there to know more.

Have any of you been (or are) overseas Canadian residents? What other pointers can you provide to fellow readers?

About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.

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Eating out is one budget item that we try to minimize as it’s typically a ‘want’.  To compensate, we do a lot of cooking in the evenings and often in bulk so that it can be brown bagged for lunch during a work day.  However, on occasion, we do like to splurge a bit and go out to a nice restaurant. Or other times when we are too tired to cook, we’ll grab a quick sandwich from Subway or Quiznos.  Even with the luxury of eating out, there are still ways to save money to keep the luxury expense to a minimum.

Here are some of those strategies that I use often to save money while eating out:

Coupons/Specials

Before heading out to Quiznos for a sandwich, I always jump online and see the current specials or if there is a coupon available.  Sometimes they offer a free drink with purchase, or even a free sub with equivalent purchase.  Most big chains have coupons or specials during various days of the week that can be used to save a few dollars off your meal.  The more you eat out, the more you’ll save with using coupons or waiting for specials.

Share

If you have a significant other, sharing your meal is another great way to reduce the cost of eating out.  For example, whenever we got to Subway we order one large sandwich with chips/drink and split the works.  Providing that I’m not overly hungry, it’s plenty of food for us and light on the pocket book .  Even entrees in main stream restaurants can be quite large and more than enough for two people, just ask the server to bring out an extra plate.

Have Water

Unless I’m out for a social event, I typically order tap water with my meal.  With a pint of  beer or glass of wine costing $5-$8, or even a soft drink costing $3, with tax and tip on top, those little charges can add up in a hurry.

Skip Dessert

Ever notice that desserts can be disproportionately priced higher than the regular food items on the menu?  It’s because the markup on dessert can be quite high.  For us, if we have a sweet craving afterwards, we head out to the local ice cream shop where soft serve ice cream are relatively low cost.

Timing

Perhaps one of the more strategic ways to save money while eating out is to time it!  As mentioned earlier about finding specials, most restaurants have attractive pricing during the days that are slower, for a lot of them it’s Monday – Wednesday.  Or another example is when we travel to the mainland, we enjoy getting our fill of Dim Sum.  If you go in the off hours which is after the lunch rush, the dishes get a reduced pricing.

Get to Know the Owners/Managers

If you frequent a particular restaurant, make an effort to get to know the restaurant ownership or management. Restaurant owners appreciate regular visitors, and may kick in free extras during meals or even a discount off your bill.

For those of you who frequent restaurants, what are your strategies to save money?

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Copyright 2010 MillionDollarJourney – All Rights Reserved

Going back into the archives, one year ago I wrote a Case Study: High Income and Consumer Debt Free

Move RRSP into TFSA? @ Canadian Money Forum

Investment Psychology: Top 5 Ways Investors Go Broke @ The Digerati Life

Stay in School, Earn More Money @ Wallet Pop

5 Ways Social Media Can Cost You Money @ Generation X Finance

One Reason to Obtain a US Dollar Credit Card @ Canadian Capitalist

Beyond the Emergency Fund: Water, Water Everywhere, but Not a Drop to Drink @ Frugal Dad

A Job vs. A Career @ Canadian Dream

The Upside of Downsizing @ The Sun’s Financial Diary

Clutter And The Curse Of The Pack Rat @ Money Smarts Blog

5 Ways the Recession has Changed Consumerism in America @ My Dollar Plan

Virtual Assistant; Do You Need A VA? @ The Financial Blogger

how to develop good habits @ Brip Blap

Paying more for less auto insurance @ Thicken My Wallet. On the same note, here are my tips on how to save money with auto insurance.

Why Warren Buffett Is Not A Poster Child for Active Management @ Where Does All My Money Go

Ten Ways Save Money with your Movie Budget @ Lazy Man and Money

RIP ETF @ Michael James on Money

Buy or Rent – Which is Better For You? @ Money Smart Life

Top 10 Places That You Absolutely Need to Save Your Leftover Coins For @ Money Energy

Enjoy the weekend!

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Copyright 2010 MillionDollarJourney – All Rights Reserved

“I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.” – Peter Lynch

Many investors believe there is some sort of cause-and-effect between the stock market and the economy. They think that if they can predict the general direction of the economy, it will help them predict the direction of the stock market and therefore their investments. However, the general direction of the economy is almost useless in predicting the stock market.

Studies (e.g. Dalbar study) consistently show that most investors buy and sell investments at the wrong times. One of the main reasons for this is because they base their decision on a mainly irrelevant factor – their outlook for the economy.

The media and professional investors very often make this same mistake. Articles about the stock market and presentations by investment companies and fund managers often include their outlook on the economy as a key part of their investment recommendations.

For example, recent articles claim now is a good time to invest because the economy is recovering from the recession, or that investors should be cautious now because of the risk of a “double dip recession”. Which one of these will happen and should this affect our investment decisions?

The usefulness of information about the economy for investing is vastly overrated. This is what we call “conventional wisdom” – something most people believe and that seems to make sense – but is false.

There are 2 main reasons why the economy is not really relevant to investing:

1. The stock market forecasts the economy, not the other way around. The stock market is the head & the economy is the tail.
2. Expectations of how the economy will perform are already built into the prices of stocks. (We will discuss this in the next article.)

The stock market is the head & the economy is the tail.

Let’s look at the facts. The best indicator of the economy is probably GDP (Gross Domestic Product), which is the total value of goods and services produced in a country. We calculated the correlation of GDP to the TSX60 from 1987-2010 and it is only 12%. This means that GDP and the stock market only move similarly 12% of the time.

Generally, correlations under 20% are considered “no correlation”. (Correlation of 100% means they move the same, -100% is negative correlation which means they move opposite to each other, and 0% means no correlation – that they move opposite as much as they move the same.)

For example, in 2008, the economy was fine, but the stock market crashed. In 2009, the economy was in a recession, but the stock market boomed (like it usually does during recessions).

Last year, I was asked quite a few times whether now is a good time to invest, given that it looks like it will be a bad year. My response normally was to ask: “Which one do you think will have a bad year – the economy or the stock market?” It is actually very rare for both to have a bad year at the same time.

* Data from Bank of Canada & Morningstar

There is, however, some correlation if you compare the stock market this year to GDP next year. This correlation is 33%, which is considered “low correlation”.

The reason that the stock market somewhat predicts the economy is that the prices of stocks include the future expectations of all investors in those stocks. This is confirmed by the Bank of Canada which uses the stock market as one of the key components of the “leading indicator”. This is a statistic published regularly by the Bank of Canada and used as a forecaster of the economy.

When investors buy an investment, the price they are willing to pay takes into account their expectation of how that investment will do. So, if investors are optimistic or pessimistic about the economy for the next year, that might affect the price they are willing to pay for an investment today. That is why the stock market somewhat predicts the economy.

A low correlation of 33% makes sense, though. The value of a company that is part of the stock market is normally a multiple of the profit of that company. If you talk to any business owner and ask them what affects the profit of their business, they will quickly rattle off a list of items – competition, taxes, available labour, new products, technology, cost cutting, the economy, etc. The general state of the economy is only one item in a long list of factors affecting profits.

In short, if we could accurately predict what the economy will do this year, then we have an indicator (only a 33% indicator) of what the stock market did last year. This is not really useful, since we already know what the stock market did last year!  :)

If we that want to know what the stock market will do this coming year, we would have to accurately forecast the economy 1.5 to 2 years from now. This is extremely difficult even for top economists to do.

So, I can settle the big debate. A “double dip recession” probably will not happen this year. How do I know? Because the stock market went up last year!

If we use the stock market for the last year as a predictor of the economy in the next year, then it looks like the economy is recovering like it always does after a recession, but possibly a bit more slowly.

A 33% indicator is not very useful. What good is an indicator that is only right 33% of the time???

You can predict the stock market more accurately by simply always predicting it will go up! In the last 25 years, the Canadian and global stock markets have been up 76% of calendar years and the US market has been up 72% of years. (Morningstar)

Conclusion:

In short, the reason why the economy is mainly irrelevant is that, even if you could accurately predict the economy 1.5-2 years from now, it would only help you predict the stock market for this coming year 33% of the time. You can predict the stock market far better (75% of the time) just by always predicting it will go up.

Our experience from evaluating fund managers, as a broad generality, is that the more a fund manager talks about the economy, the worse investor he is!

The next time you read an article about the economy, remember that it tells you virtually nothing about what will happen to your investments. Just repeat to yourself: “The stock market is the head of the dog and the economy is the tail.” You can’t really tell where the head is going by studying the tail.

If you are an investor, stop wasting time trying to predict the economy. The economy is not really relevant to stock market investing. It is almost useless for predicting the stock market.

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

This is a column by real estate writer Rachelle.

Does it ever make sense to buy a real estate investment that is cash flow negative? Of course it does! Sure we’d all rather buy a nice well maintained cash flowing building stuffed to the gills with working professionals who all pay their rent by postdated check before the first of the month. Does this property even exist? If it did why would the owner sell it?

Cash Flow Positive Doesn’t Mean Anything!

There are number of ways to make almost any property cash flow. For instance you could buy a $500,000 condo and pay cash for it and rent it for $1000 per month. It will cash flow and you’re a hero… right? Not really, sorry.

You can also remove a chunk of very real expenses (like real estate agents do) to make your new acquisition sound better than it is. Vacancy and maintenance are two of these expenses. Some months may go by without anyone moving or things breaking. If you do the property management yourself, there is no expense, right? Again, not really. These are real costs that must be budgeted for and that will eventually catch up to you.

You could also buy a building with 10 suites, include all expenses and then your cash flow is $100 per month. Positive cash flow indeed. A million or more price tag, and $300,000 down plus closing costs and you’re making a whole $100 per month for your trouble. Don’t spend it all in one spot!

As you can see this oft repeated mantra means absolutely nothing. Investors go and try to find the holy grail of positive cash flow and they are looking for the wrong thing.

Cap Rates and Interest Rates

First, to measure the viability of your investment, use my Cap Rate Spreadsheet which is a measurement of a real estate investment.  When you play with the spreadsheet it immediately becomes apparent that your ROI (Return on Investment) is the difference between your mortgage rate and the cap rate. So if your mortgage is 5% and your Cap Rate is 5% you make about $0. If your mortgage rate is 5% and your Cap Rate is 6% that means you will make 1% but on the whole value of the building.

Why Buy Cash Flow Negative?

There are all kinds of reasons to buy cash flow negative properties. Land for instance is always cash flow negative. The usual strategy for buying land is to pay for it and wait. Buy on the outskirts of a growing city and pay the loan and property taxes year after year and wait until your land is desirable. Some investors take this a step further and brave the intricate morass of regulation and subdivide their land into lots for homes. This is just one example of a profitable way to make money in real estate that means continual outlay of cash into the asset for long periods of time. The sale of the land nets the profit or loss depending on how smart your selection process was.

The real estate market is currently very competitive. Investors are looking for ways to increase their returns. The stock market burned a lot of hard working savers. Lots of them are looking to do better than the 2% interest offered by high interest savings accounts. Naturally many of them have turned to real estate as a sure bet. Most of them don’t read Million Dollar Journey and they are trying to find positive cash flow in all the wrong places. I have explained at length that properties should pay you and how to calculate Cap Rates and ROI (return on investment) in my post Landlord Math.

Value Add Properties

A Value Add property is the most common way to buy cash flow negative and make a return. Basically you are finding a property that no one else wants. It’s ugly and needs TLC. Maintenance has been deferred and sometimes it’s no longer livable. Vacancy and evictions are the norms. A property like this can be bought and made to cash flow like crazy. You buy at today’s market prices which are not sustainable but you develop the property from horrible to very good. Tenants move and you fix and renovate and increase the rents. It can take several years before the building stabilizes and starts to pay you.

Highest and Best Use

Sometimes properties are not properly designated. For instance I saw a property for sale on Gerrard Street here in Toronto being used as a principle residence for the last 50 years. Surrounding this property are commercial spaces. The property is worth a lot more as a commercial space as it would generate a lot more revenue. There are so many strategies that change the use of properties, I can’t even enumerate them all.

Appreciation and Falling Markets

Most of us have only known a real estate market that consistently goes up. Does this mean that you should not buy? It’s much better to buy into real estate at the bottom of a downturn. However; if you want to invest in real estate you have to buy in the market that exists today, not the one that may exist tomorrow. The trick is to buy the right property at the right price.

No one’s building goes up in a falling market no matter how great it is. What matters is your ability to withstand a downturn. If the building is paying you to own it, this gives you the freedom of not caring how much it is worth. Like a well chosen dividend fund, it goes up, it goes down… who cares when you’re getting 9% ROI. I’d go long on the mortgage to make sure that when rates rise, I’d be protected until enough equity is built up to be able to refinance at almost any rate.

The Real Secret to Real Estate Success

The true mantra you need when looking at real estate is “How Can I Make Money from This?” There are as many ways to make money in real estate as there are buildings. Every building and location is different. You need to be flexible and innovative and learn as much as possible about the business. You’ll need to be prepared for a prolonged search and to say no to investments with no potential. In times when the real estate market is tight, money is cheap and competition is fierce, you’ll want to separate yourself from the pack and look for something different in neglected asset classes.

Happy Hunting!

About the Author: Rachelle specializes in renting property on behalf of landlords and is the blogger behind Landlord Rescue. She also works with investors to find good investments in Toronto and surrounding areas. Her passion is bringing multi res properties back from the brink and maximizing profitability. Check out some of her other real estate posts on MDJ.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

Over the past few years, dividend growth investing has become one of my favorite investing strategies which is evident in the number of times I’ve written about the topic.  I follow the dividend growth investing strategy as it can generate a growing tax efficient income stream over time as well as the comfort of receiving a portion of the companies profits on a quarterly basis.

In most of  my previous articles about dividend investing, I mention the importance of giving attention to the dividend payout ratio.  As I’ve received this question from a reader, here are more details about what payout ratios are, why they are important and how to go about finding or calculating it.

What is the Payout Ratio?

Lets start off by explaining that the dividend payout ratio is the amount of dividends that a corporation pays out to shareholders relative to their net income (income after expenses) or earnings.  In the most basic form:

Payout Ratio = Dividends Paid/Earnings

or

Payout Ratio = Dividends per Share/Earnings per Share

Why the Payout Ratio is Important

The dividend payout ratio will tell you how much of net income that dividends are chewing up which is relevant in evaluating the sustainability of the dividend.  Generally speaking, payout ratios will vary by industry.  Utilities with very steady and predictable cash flow may have a relatively high payout ratio, while bank and financial companies will be in another range.  If earnings are poor, thus a higher payout ratio,  there is a probability of the dividend being reduced or eliminated as the management has that option to conserve cash.

How do you Find or Calculate Payout Ratios

The easiest way is to visit a website that does the calculations for you – like stockhouse.ca.  However, with this strategy, there are times when the ratios are not updated with the most recent earnings.  If you want to manually calculate payout ratio, you’ll need to pull the earnings and dividends data  from company financial statements.

For example, if I take a look at TD, a popular Canadian bank,  Google Finance tells me that in the most recent quarter, TD had a net income of  $1.30 per share (EPS) and dividends of $0.61 per share.  In this case, the payout ratio for the quarter was 47% which is fairly low for a bank.  In addition to looking at the quarterly numbers, I like to review annual reports in case the quarter was an anomaly.  In this case, for the trailing 4 quarters, TD has a payout ratio of approximately 50%.  As mentioned, I like to compare payout ratios by industry, so it would be good practice to compare the payout ratios of the big 5 banks.

For those of you who are really savvy, instead of calculating dividends as a percentage of earnings, you can calculate them as a percentage of free cash flow.

What is an Acceptable Ratio?

As I mentioned earlier, it’s difficult to say what payout ratios are acceptable as every industry has their own range.  However, if a company reports consecutive quarterly losses without a good strategy to get back to profit, then it’s a red flag that there could possibly be a dividend cut.  Remember, it’s up to the management as to how much the dividend is reduced or cut altogether.

For you dividend investors out there, how do you use payout ratios when determining valuation?

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Copyright 2010 MillionDollarJourney – All Rights Reserved

It’s been a while since I’ve had a “best of” article.  It seems with the constant content written for MDJ, some great articles just get lost in the pile.

Here are some of my favorite articles over the past couple months.

1. Deciphering the Insurance Puzzle – I (CMHC, Mortgage Life, and Term Life) – This article series stems from a reader email and explains the basics of common insurance options in Canada. Here is part 2: Deciphering the Insurance Puzzle – II (Universal Life, Disability, Critical Illness)
2. Capital One Aspire World MasterCard Review – This was a guest post by rewards fanatic and regular reader Elbyron which reviews one of the best new travel rewards credit cards introduced in a while.  Once my free for a year AMEX spg expires, this card is a top contender for my first fee based credit card (big deal for me!)
3. Using Put Options to Protect Your Portfolio – With the volatility in the market, there are some ways to “insure” your portfolio with put options.  They aren’t as complicated as you think!
4. How to Attract the Best Tenants – This was a guest article from our resident real estate guru, some great tips here for real estate investors.
5. A Primer on Bonds – I (The Types of Bonds) – This is a great series that gives the basics of bonds and how to invest in them.  Here is part 2: A Primer on Bonds – II (Investing in Bonds)
6. Spending your Tax Refund – By now, most of you have filed your return and received your tax refund. This article details some ideas on what to do with the extra cash.
7. Closet Indexers vs. Stock Pickers – Truly Active Managers Outperform – This article explains in order for a mutual fund to outperform, they need a high “active share”.
8. Retirement Income ETF Portfolio – This is a mockup low cost ETF portfolio that produces a steady income.

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Copyright 2010 MillionDollarJourney – All Rights Reserved

With extremely volatile markets since 2007, Gold has been a favorite safe haven for investors to wait out the storm which is evident in the run up in price.  There are a large number of Gold advocates that promote gold as an essential piece of any portfolio.   As gold has gotten a lot of press lately, I decided to do a little digging on how a regular investor can get some (or more) exposure to the shiny yellow metal.  Note that the only portion of gold in my portfolio is from my position in the Canadian Index.

Physical Gold

There are people that do not believe in the markets and hold physical gold for their gold exposure.  While this strategy may avoid management fees that occur with ETFs or mutual funds, there are limitiations.  Two of which are that with physical gold, like gold bars, require physical space and liquidity can be an issue.  Imagine trying to sell gold bars on kijiji! 

Claymore Gold Bullion Trust (TSE:CGL)

This is perhaps one of the easiest ways for Canadians to purchase and hold gold bullion.  This ETF holds physical gold bullion and tracks the price in Canadian dollars. CGL charges a Management Expense Ratio (MER) of 0.50%.

SPDR Gold Shares (NYSE: GLD)

This ETF is in USD, and also holds and tracks the price of gold bullion.  The pricing is set to approximately 1/10 the price of one ounce of gold and charges a 0.40% MER.

Horizon Beta Pro Leveraged Gold (TSE: HGU/HGD)

The pair of ETFs are from horizon beta pro and are leveraged 2x on a daily basis.  Leveraged ETFs are specfically taylored for traders and not for long term buy and hold investors.  The reason being is that the leverage is calculated on a daily basis, so even if the underlying index is trading relately flat (or basing), the leveraged ETF can potentially go down in price.  As well, the MER is fairly high for an ETF where it charges 1.2% annually.  Trading this security is not for the weak.

iShares Global Gold Index (TSE: XGU)

This is an iShares ETF that tracks the Global Gold index.   As with any index, this ETF will move in price depending on the performance of the underlying securities.  The top 3 holdings, which make up over 40% of this ETF, are Barrick Gold, Goldcorp, and Newmont Mining.  This is a Canadian product, thus traded in Canadian dollars with  a MER in the amount of 0.55%.

Common Stock

If you don’t like the idea of paying a management expense ratio to purchase the index, then consider purchasing the individual stocks instead.  As mentioned for the iShare Gold Index XGD, owning the top 3 positions is a fairly close proxy for owning the index.

As I’m fairly new to the gold game, I’m sure that there are many other ways to invest in gold.  If you have gold in your portfolio, what is your strategy?

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This is a guest post by travel enthusiast Matthew Kepnes.

Europe is one of the most popular destinations for North Americans.  Yet even with the slide in the value of the Euro, it is still not a cheap destination. Cheaper than before but still not cheap. However, there are many ways to cut down the cost of a European Vacation.  We don’t live a good financially sound life so we can spend all our money on a two week vacation.  Just like good money management requires planning, so does going to Europe.

Here are 8 ways to save money on your next trip:

1. Don’t do Dinner

In Europe, restaurants offer a set lunch menu, often called the plate of the day. This menu has a number of dishes at an affordable cost. For dinner, these same meals might cost double. Eat out at the nice restaurants for lunch and save money. In Barcelona, “la menu de dia” is usually 10 Euros while a dinner at the same restaurant can run around $35 Euros.

2. Get a Eurail Pass

Traveling around Europe doesn’t have to be expensive. If you plan on visiting a lot of countries or covering a vast distance, get a Eurail pass. These passes offer you unlimited travel within a set time frame and can be used for 1, 3, or 15 countries, or over number of days or months. You pick. When I used mine last summer, I saved over $650 dollars. You can read my Eurail pass review here.

3. Use Tourism Boards

City tourism websites are often an overlooked source of information. People tend to stick to their guidebooks but that information is at least a year old. City tourism websites have a long list of current activities, events, and deals that cost little or no money to you.  While in Amsterdam, I found a city fair because I looked on their website. I spent an afternoon at this event and it didn’t cost me any money.

4. Couchsurf

Couchsurfing is a global phenomenon where people offer other travelers a place to stay for free. The site has over 2 million members.  Locals open up their home to you and provide you with a free place to stay. It’s safe as members as verified by other members and the service. (Other than not getting along, I’ve never heard of a problem!) Most will host families and couples- you don’t need to be a single traveler.  This not only provides you with free accommodation but also gives you a chance to meet the locals and get local tips on what to see, do, and how to save even more money.

5. Take Free Tours

In most of the major cities in Europe, you will find free tours of the city. They are a great way to see the city, get your bearings, and learn about the city without ever paying for it. The biggest company is New Europe and they have tours in about 10 different. I’ve done a few of their tours and they have been very informational. You can find more about them here. However, even if they don’t offer a tour, you can find someone else that does.

6. Go off Peak

The most expensive part about Europe is getting there but if you avoid the summer months, flights will be much cheaper. Visit during the shoulder seasons of the spring or the fall and you can find prices much cheaper and the weather still as nice. Also, use Momondo.com for your flights. They search websites around the world and not just in the US.

7. Skip the Major Cities

Europe has millions of great places to see besides Paris, Rome, London, Milan, etc. Save money by avoiding the big cities. Go to alternative destinations like Croatia, Poland, Budapest, Cornwall (in England), or Southern Germany. Get off the beaten path a bit and you’ll find prices drop a lot. These places are just as good, just as fun, and just as beautiful but without the crowds or high costs.

8. Find the Freebies

In every city, you’ll find free exhibits, museums, and attractions. You just need to research. The Louvre is free on Fridays. All museums are free in England.  FOAM, an art museum in Amsterdam, is free.  But I didn’t know any of that before I did some research. If I didn’t use Google, I never would have known the Prado in Madrid is free from 6- 8pm. Before you go on your trip, do a little research and get a list of free attractions. Often times we assume things aren’t free or cost money when they don’t. A simple Google search can help with that.

Europe doesn’t have to be an expensive destination. I manage to travel around Europe on around 60 Euros per day by following the tips above. Just because we are on vacation doesn’t me have to waste money. There are plenty of ways to have a good time without spending a lot of money.   Budget travel doesn’t have to mean hostels and ramen noodles- it just means thinking outside the box.

Matthew Kepnes has been traveling around the world for the past four years. He runs the award winning budget travel site, Nomadic Matt’s Travel Site, and has been featured in The New York Times, The Guardian UK, AOL’s Wallet Pop, Wisebread, and Yahoo! Finance. For more travel tips and money saving advice, visit his website.

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Welcome to the Million Dollar Journey July 2010 Net Worth Update

Very little has changed since the June update.  In fact, the updates look very similar with the biggest increase this month again being … savings!  While building and generating cash is the goal, it can become an issue if you don’t know what to do with it.  With excess cash, my first choice is to pay down debt, but in my case, my only debt remaining has extremely low interest, or is tax deductible.  The next option is to invest it, which is where I see most of the cash balance going.  For 2010, I haven’t made any RRSP contributions yet, so I’ll be sure to get on that soon.

For those of you who have strong cash flow, what are  your priorities for cash allocation?

On to the numbers:

Assets: $ 531,900 (+1.00%)

• Cash: $4,500 (+0.00%)
• Savings: $50,000.00 (8.93%)
• Registered/Retirement Investment Accounts (RRSP): $76,500.00 (+0.26%)
• Tax Free Savings Accounts (TFSA):  $19,900 (-0.47%)
• Defined Benefit Pension: $30,450.00 (+1.67%)
• Non-Registered Investment Accounts: $12,300.00 (+0.69%)
• Smith Manoeuvre Investment Account: $55,000.00 (+0.92%)
• Principal Residence: $283,250 (+0.00%) (purchase price adjusted for inflation)

Liabilities: $68,200.00 (-2.15%)

• Principal Residence Mortgage (readvanceable): $13,800.00 (-10.97%)
• Investment LOC balance: $54,400 (+0.37%)

Total Net Worth: ~$463,700.00(+1.49%)

• Started 2010 with Net Worth: $399,600.00
• Year to Date Gain/Loss: +16.04%

Some quick notes and explanations to net worth questions I get often:

The Cash

The $4,500 cash are held in chequing accounts to meet the minimum balance so that we pay no fees (accounting for regular bill payments). Yes, we do hold no fee accounts also, but I find value in having an account with a full service bank as the relationship with a banker can prove useful.

Savings

Our savings accounts are held with PC Financial and ING Direct. We usually hold a fair bit of cash in case “something” comes up. The “something” can be anything that requires cash such as an investment opportunity that requires quick cash or maybe an emergency car/home repair.  We also need cash to cover any future tax liabilities.

Real Estate

Our real estate holdings consist of a primary residence plus a rental property. The value of the principal residence remains valued at the purchase price (+inflation) despite significant appreciation in the local real estate market.

Pension

The pension amount listed above is the value of both of our defined benefit pension plans.  I basically take the semi annual statement and add the contribution amounts (not including employer matching) on a monthly basis.

Stock Broker Accounts

Another common question is which discount broker do I use?   We actually have accounts with multiple institutions.  I’m hoping to reduce the number of accounts that we hold in the near future.  Here is a review of some of the more popular online stock brokers.

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One year ago today – Buying a Car from the U.S – The Pros/Cons and Process

Interesting Investment Information @ Canadian Money Forum

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wealth and intelligence @ brip blap

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What to Let Go to Get to Know Wealth @ The Sun’s Financial Diary

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