Canadian Capitalist

This and That: 100x ETFs, TFSAs and more…

Canadian Capitalist — Thu, 19 Nov 2009 22:40:06 +0000

It is funny and incredible at the same time. Jon Chevreau reported on the Wealthy Boomer Blog that as a joke an author faked a news release announcing the launch of the first 100x leveraged ETFs — the Kelly Daily NASDAQ 100 Bull 100x ETF (Ticker: SOAR) and the Kelly Daily NASDAQ 100 Bear 100x ETF (Ticker: SINK). What happened then makes you wonder about the sanity of investors: 65% expressed an interest in owning these ETFs, 5% were “pretty sure” they already owned the 100x ETFs and only 30% got the humour. I wonder if Scott Ronalds of Steady Hand should have kidded about the H1N1 Fundamental Vaccine Equity Plus Fund
It is heart warming to read Tax-Free Savings Accounts are proving to be very popular with Canadian investors. The Globe and Mail reported that Canadians have opened up 3.6 million TFSA accounts holding an average of $3,400.
Recent college graduates are entering a grim job market with few, if any, job openings. Brad offers five tips to make yourself more attractive to potential employers in a tough job market.
It could happen to anyone and when it does, it is very stressful. Frugal Trader on what steps to take now to mitigate the loss of a purse or wallet.
Michael James points out that even when investment advice is sound, investors often read into them what they want to hear.
Mr. Cheap points out that many investors forget to account for the value of their labour in figuring out the return on investment from their business.
Canadian Financial Stuff believes that Bill Belichick did not take a prudent risk when the Football coach decided that the Pats will go for a fourth down on their 28 yard line when trailing the Colts by 6 points with 2:08 left on the clock. He warns against taking risks in finances, just as in football, when the downside is too great.
David Bach made a career out of one idea — automate your finances. Gail agrees and says that automating your finances will make your life easier and free up time for other pursuits.
While some jurisdictions may accept hand-written, holographic wills as valid, Thicken My Wallet says that the prudent course is to draft a will through a lawyer or a will kit.
Don’t have a CLU about what FRM stands for? Preet has a nifty graphic on what different advisor designations stand for. Hint: view it on Internet Explorer.

Check out Today’s Economy Blog by Kevin Press. While Mr. Press works for Sun Life Financial and his blog is about navigating the treacherous waters of today’s economy and markets.

I’m unable to highlight all the articles worth checking out in my weekly round up but you can check them out through my Twitter feed. Have a great weekend everyone!

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What are these home owners thinking?

Canadian Capitalist — Wed, 18 Nov 2009 15:55:29 +0000

We are just recovering from a punishing recession in which millions of jobs were lost and portfolios were decimated by a market downturn. Across the border, home owners are defaulting on their mortgages in record numbers because they loaded up on mortgage debt at teaser rates and are unable to make mortgage payments when the rates reset at a much higher level. Therefore, it is surprising to read that many Canadians refuse to learn from recent experience and are loading up on long amortization, variable-rate mortgages at record low interest rates. The Globe and Mail reported today that mortgage brokers are doing brisk business as many first-time home owners rush in to take advantage of today’s (probably temporary) low rates:

It’s these buyers who have raised fears of a bubble, negotiating mortgages at historic lows, opting for 35-year terms and making small 5-per-cent down payments to keep monthly outlays down and put previously unaffordable homes within their reach.

“They are taking advantage of things that are a lot more attractive initially but they could find themselves in a position where they couldn’t afford their mortgage if rates start to go up,” Mr. Averbach says.

This report comes in the wake of a recent interview The Toronto Star conducted with Peter Aceto, CEO of ING Direct Canada:

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

Those who fail to study history are condemned to repeat it. Those who ignore very recent experience are just being stupid.

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New PowerShares Mutual Funds

Canadian Capitalist — Tue, 17 Nov 2009 14:32:36 +0000

Unlike Mackenzie, which opted for a strategy of attacking the enemy, Invesco Trimark is adopting a strategy that can only be described as “if you can’t beat them, join them”. As Jon Chevreau reported yesterday, Invesco Trimark has launched mutual funds that hold US-listed PowerShares ETFs and pay a trailer fee, which would make it attractive for the advisor channel.

It is hard to get excited about these new-fangled mutual funds because rather than providing investors with a genuinely better product, Invesco Trimark’s approach smacks of a fund company trying to cash in on a hot trend. The first thing you notice about these funds is that five of the six new funds track narrow, niche sectors such as Agriculture, Water, Precious metals, Clean Energy and China –hardly the first, or for that matter, last, choice of index investors.

The funds are also pricey — the cheapest fund sports a fee* of 1.65% and all the funds are front-end loaded. The new fund line up has just one fund that can be called broad market: the PowerShares FTSE RAFI Emerging Markets. It has a fee, excluding operating expenses and taxes of 1.90%. In comparison, a financial advisor licensed to sell stocks and charging a 1% fee would be able to capture emerging market exposure for less than 1.5% including MERs and trading commissions.

Investors should keep in mind that the ideal ETFs track broad-market indices efficiently at a very low cost. All other ETFs or mutual funds holding them should be approached with caution.

PS: Rob Carrick says these mutual funds are taking ETFs to the masses.

PPS: Michael James isn’t impressed with the new funds: “they walk and talk like mutual funds, but advisors can call them ETFs”.

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Derek Foster Attempts a Comeback

Canadian Capitalist — Mon, 16 Nov 2009 03:18:35 +0000

I was a big fan of the Getting Going column that Jonathan Clements used to write The Wall Street Journal. Mr. Clements does not write for the Journal anymore but he has a book out called The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money. The book isn’t exactly new (published in June 2009) but I’ve been meaning to read and review it — Mr. Clements is a terrific writer and anything from his oeuvre is worth reading. I dropped into a Chapters store near my home hoping to pick up a copy of the book but instead I stumbled on a new book by Derek Foster “Stop Working too: You Still Can!”

Regular readers might wonder why I would waste any more time or pixels on Mr. Foster but I confess to the same morbid curiosity displayed by drivers slowing down to rubber neck at a crash site. I did not buy a copy of the latest book but I did browse through it. Here are the highlights:

Foster has ditched the “Canada’s Youngest Retiree” tag and is now calling himself “Canada’s Millionaire Investor”. Which begs the question: Didn’t he claim in the first book that even young retirees don’t need anywhere near $1 million to retire?
If you ignored Foster’s background, you would concede that the book isn’t bad overall. The book is filled with conservative tips: negotiate a discount from the posted rate on the mortgage, take advantage of mortgage pre-payment privileges, don’t take on credit card debt, invest in TD e-Series funds and ETFs, check out DRIPs, construct your own Principal-Protected fund, etc.
Believe it or not, you’ll even find some discussion on risk. For instance, Foster even acknowledges that his “money for nothing” strategy has a “catch” — an investor could miss out on substantial gains. He should know: stocks are up 30% (excluding dividends) since he sold his entire portfolio to implement a strategy of selling put options.

There is little to quibble with the do-as-I-say part of the book but Foster maintains that “his strategy” of dividend-growth investing is still working even though he got off that train earlier this year. Overall, this isn’t a bad book but with the beating that Foster’s credibility has taken, I wonder if this will be as successful as some of his earlier books.

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Book Review: Understanding Wall Street

Canadian Capitalist — Thu, 12 Nov 2009 04:11:15 +0000

I was surprised to learn that this book by Jeffrey Little and Lucien Rhodes was first published over 30 years ago, is now in its fifth edition and has sold over one million copies. I say surprised because I hadn’t even heard of the book in all these years of writing the blog and reading (or at least being aware of) pretty much every popular book on personal finance and investing out there. After reading the book, I don’t find its popularity and longevity surprising at all — it is an excellent primer on stocks, bonds, options, exchange-traded funds, precious metals etc.

The authors have packed a vast range of topics ranging from financial manias to the history of Wall Street to its many colourful personalities in the book’s 350 odd pages. The result is a valuable reference book that you can turn to whenever you want a quick explanation for an investment concept. The book is filled with delightful sidebars, photographs, newspaper clippings, charts and graphics. For instance, a sidebar on the profitability of selected industries shows that Broadcasting ranks among the most profitable (almost as much as drugs) and, unsurprisingly, Airlines rank among the least profitable.

The paperback book is published by McGraw Hill and is available from Amazon for $17.50. Amazon’s Look Inside feature allows you to browse through some of the content. In the interest of full disclosure, I should point out that a review copy was provided by the publisher.

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TD Canada Trust offers up to $250 cash

Canadian Capitalist — Wed, 11 Nov 2009 03:12:40 +0000

TD Canada Trust, which used to attract new customers by offering iPods, is now offering hard, cold cash of up to $250 to customers opening a new bank account. The promotion was initially limited to a few locations but TD Bank has now extended it to all its branches. There are three tiers of cash bonuses on offer:

$100 for opening any chequing account and signing up for direct deposit plus two pre-authorized debits or signing up for TD Bank’s Simply Save.
$150 for opening up an Infinity Account or Select Service Account and fulfilling the above conditions.
$250 for opening up an Infinity or Select Service Account, fulfilling the conditions in (1) and signing up for an approved TD Visa credit card and making ten purchases with it.

It may not make much sense to jump through hoops just to snag the cash offer but if you’ve considered switching to TD Canada Trust for their all-you-can-eat Select Service account, this may be the chance you were waiting for. The Select Service Account comes with unlimited transactions, personal cheques, a small safe deposit box, free US dollar chequing account and annual fees waived for many TD Visa cards. One of these cards, the TD Gold Elite Visa, offers emergency roadside assistance for the card holder and her family. The monthly fee on the Select Service Account is $24.95 which is waived with a monthly balance of $5,000. TD Bank’s offer is tempting because the Select Service Account features that I’m interested in (but don’t currently get for free elsewhere) are worth around $200 per year. Still, I’m inclined to stick to our current banking arrangements as I’m don’t want to constantly watch for the balance dipping below $5,000.

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The Sad Story of Nortel LTD Beneficiaries

Canadian Capitalist — Tue, 10 Nov 2009 04:26:19 +0000

Among the many injustices surrounding Nortel’s bankruptcy — and there are many — the one that is the most heart-wrenching is the uncertainty faced by former employees who are currently disabled and are receiving benefits from the company’s long-term disability (LTD) plan. These unfortunate people made regular contributions to Nortel’s LTD plan — in fact, some employees even made optional contributions to top up their benefits — to secure their financial future in the unlikely event that were to become disabled. Now, they are finding that instead of insuring the LTD plan through a third-party, Nortel decided to “self-insure” and fund the liability through its general revenues. With the company in bankruptcy proceedings, Nortel’s disabled former employees face the prospect of being left with nothing.

It is too easy to simply blame Nortel’s past management for cutting corners with disability benefits. The fact remains that regulations do not require private companies to either set aside funds to meet their LTD plan obligations or pay a third-party to assume these liabilities. It is also shocking to read that governments have been asleep at the wheel despite the same situation playing out at Eaton’s in the 1990s and Massey Combines in the 1980s. Instead of displaying indifference to the fate of Nortel’s disabled employees, our governments have a moral obligation to (a) introduce legislation to protect employees who are members of current LTD plans and (b) ensure that the financial benefits due to disabled employees are paid in full. It is simply the right thing to do.

PS: Check your LTD plan to see if the coverage is provided by a third-party insurance provider. If you can’t find this information, ask your HR department how the plan liabilities are met.

Later: Check out “Are your employee benefits in jeopardy?” for Thicken My Wallet’s take on this issue.

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Financial Security: It’s Simpler Than You Think

Canadian Capitalist — Sun, 08 Nov 2009 23:19:34 +0000

[Note: Today's post is an excerpt from a recent new book titled "You Can't Eat Your Furniture: A Simple Plan For a Well-Fed Retirement". The author, Robert Chown, is an investment advisor with one of Canada's leading investment firms. In the first chapter, part of which is excerpted below, Mr. Chown argues that only two factors matter when it comes to retirement planning: the rate of savings and the rate of returns. It may just be common sense but the basics are often forgotten in personal finance discussions. Enjoy...]

My clients are mostly well-educated, intelligent, high-earning professionals who have everything going for them from a financial standpoint. But before they sought my advice, many were not on track to reaching their financial goals. As often as not, they didn’t even have clearly defined financial goals.

If these folks find it hard to set and achieve such goals, then obviously income, intelligence, and education are not prerequisites to achieving financial security. This is good news for the rest of us!

No matter who you are, achieving your financial goals can be simple. Consider, for example, the goal of building a retirement nest egg. From a purely mathematical point of view, success or failure rests on only two variables: your rate of savings and your rate of return.

Your rate of savings is how much you save for retirement, and when you save it. Your rate of return is a measure of the performance (over a given period of time) of the investment products in your portfolio. Investment products can include stocks, bonds, mutual funds, real estate, and guaranteed term deposits, to name just a few.

These two variables are equally important. For instance, your rate of return may be stellar, but you will not accumulate enough capital if your rate of savings is too low. Conversely, your rate of savings may be adequate, but you will not accumulate enough capital if your rate of return is too low. Either way, if you don’t accumulate enough capital, you won’t be able to retire as soon as you planned to, or you will have to get by with less retirement income than you had hoped for – or both.

Now that you know that only two variables determine your success, you can create a simple mathematical model of your retirement strategy. Once you assign a value to one variable, you can calculate the other. For instance, if you assume a rate of return, you can calculate how much you need to save over a given period of time to achieve your retirement objectives. If you assume a rate of savings, you can calculate the rate of return you need to achieve your retirement objectives. Many financial management software products and websites have tools to help you perform these calculations.

From a mathematical standpoint, everyone who starts with a reasonable set of assumptions should be able to find out what they need to do in order to meet their retirement goals.

If It’s So Simple, Why Doesn’t Everyone Succeed?

We’ve now narrowed down the entire financial planning and investment industry to only two variables, the rate of return and the rate of savings. Everything else is superfluous. This means that you need to focus on just two things for your retirement strategy to succeed. But it also means that there are only two things that can cause your retirement strategy to fail: either you don’t save enough or you don’t get an adequate rate of return. This may seem simple, but if you don’t have a plan, you can be sure that distractions, temptations, and human foibles will conspire against you.

[You can read the rest of Chapter 1 here. The book is available on Amazon.ca for around $15. I'll be posting my book review in the near future.]

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This and That: Who killed Nortel and more …

Canadian Capitalist — Fri, 06 Nov 2009 02:58:23 +0000

Ten years back Nortel looked invincible. Today, it is in bankruptcy protection and its business units are being sold off piece by piece. The Ottawa Citizen’s James Bagnall is writing an eight-part series on the fall of an once-proud telecommunications giant.
There is a widespread belief among investors that 1970s style inflation is inevitable. Money manager Leith Wheeler reckons that inflation is unlikely to be as high or as prolonged as it was back in the 70s.
Charles Schwab announced a slew of low-cost, broad-market ETFs this week that could be bought and sold commission-free through a Schwab account. Larry MacDonald speculates if other ETF vendors would be forced to cut MERs or even reimburse trading commissions.
It may sound harsh but it must be asked: Do Canadians deserve the MERs they get? Jon Chevreau writes that Canadians are apathetic about investing costs and mutual funds rarely pass on the savings from economies of scale to unit holders.
A recent TD economics report put the cost of a future university education in five figures. Million Dollar Journey debates how he plans to fund his child’s post secondary education.
Michael James reviews Super Trader: Make Consistent Profits in Good and Bad Markets and find little evidence the book will help anyone trade profitably.
Canadian Financial Stuff reports that TD Waterhouse is finally offering a RDSP account.
The Dividend Guy kicked off a series of posts on the top 100 investment lessons he has learned.
Mike has a stocking stuffer idea for Christmas — Investing Made Simple book.
The Intelligent Speculator debates if currency-hedged ETFs are good or bad.

Check out the A Loonie Saved blog written by Patrick. He doesn’t update it often these days but there are some excellent articles in the archives. Have a wonderful weekend everyone!

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2009 Globe and Mail Discount Broker Rankings

Canadian Capitalist — Thu, 05 Nov 2009 03:00:34 +0000

For the fourth year running, Qtrade finished first in the Globe and Mail’s ranking of online discount brokers. Credential Direct, BMO InvestorLine, Scotia iTrade and RBC Direct Investing round out the top five. TD Waterhouse missed a spot in the top five in a photo finish.

I’ve held accounts at TD Waterhouse, RBC Direct Investing, Scotia iTrade and Questrade and would rank them in that order. I wouldn’t read too much into a broker’s rank and would instead pick one that offers the features I’m looking for (or at least a nice fat bonus).

Some interesting tidbits from the Globe and Mail column:

Qtrade is now offering US dollar RRSP accounts. Either Qtrade has been keeping it quiet or I missed any media coverage on this.
Discount brokers are doing roaring business. Rob Carrick, who assembled the rankings, notes that account openings, excluding TFSAs are up in the range of 19 to 26 percent.
Scotia Direct is going to be merged with Scotia iTrade (formerly E*Trade Canada), which is not surprising because CIBC and Scotia are still in the bottom of the heap among discount brokers.
RBC Direct is the only broker offering lower-fee mutual funds. It is outrageous that discount brokers keep collecting trailers fees, which are supposed to compensate financial advice.

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