Categories
Announcements

Are You Changing Your Asset Allocation? Contest for $$!

Glenn Cooke, President of InsureCan, is sponsoring a contest on this blog (and a few others listed below) where you can win one of two $50 Chapters gift cards. Here’s how to enter the contest:

In the comments – please answer the following question

“Have you changed (or are you going to change) your asset allocation as a result of the awful equity returns in the past year?   Please indicate any change ie “used to be 100% equities – now I’m zero percent equities”.

Answering this question will give you 1 chance at a gift certificate.  Subscribing to the blog if you don’t already do so, might also help your odds (but not likely) 🙂

Contest will be closed at 8 pm on Thursday, January 22.

Contest is open to Canadian residents only.

Check out similar contests at the Canadian Capitalist and the Financial Blogger.

Categories
Investing

RBC Direct Discount Brokerage Review

I recently moved my investment accounts from Questrade to RBC Direct in order to take advantage of the RBC 1% rebate deal so I thought it would only be fitting to do a review of their services.

Who are they?

RBC Direct is the discount brokerage arm of the Royal Bank of Canada which is the biggest Canadian bank.

Good things about RBC Direct

I like the trading platform – it looks nice, easy to use and is well designed.  There is also access to analysts reports etc.  It does the job.

If you would like to compare all the different Canadian discount brokerages, check out the Canadian discount brokerage comparison.

Bad things about RBC Direct

Everything else.  🙂

Fees – ridiculous fees in my opinion.  $10/trade is not bad for a passive investor but why anyone would pay $29 a trade is beyond my comprehension.  I’ve outlined the fees at the bottom of the post.

No electronic money movement
unless you have a RBC bank account.  This is the stupidest thing about RBC – yes, I understand they want to ‘bundle’ all their services but forcing investors to open up new accounts to use their discount brokerage when most of the other discount brokerages offer excellent electronic money movement options is just bad business.  Get out of the stone age RBC!

In order for me to put money into the account, I have to write a cheque and mail it to them.  If I want to remove any money – I have to pay $10 for a cheque to be written.  My plan is to keep all cash in the account until next year when I can move back to Questrade and then withdraw it electronically.  The most annoying part of this is that when I looked into the 1% deal – a customer service rep told me on the phone that I could do electronic money movement which turned out to be false.  Speaking of customer service….

Bad Customer service

I won’t bore you will the multitude of issues I’ve encountered with RBC but suffice to say that I think their computer system was probably build sometime in the 20’s which makes it very hard for the customer service reps to do their job.

Most of the reps are pretty good although one time I called without an account number and the rep told me it was “very hard to look up an account without the account number”.  I challenged him on it and he somehow was able to find the account immediately just using my name.  Kudos jackass…kudos.

Conclusion

I can’t really recommend RBC Direct since I really don’t like them and can’t wait to collect my 1% and go back to Questrade.  However, if you already do your banking with RBC and have a $100,000 in assets then they are not a bad choice.  If you don’t meet those criteria then look elsewhere.

Trading Fees

  • $28.95 per trade unless you have $100,000 in household assets at RBC Direct or complete more than 30 trades per quarter.
  • $9.95 if you have $100,000 in household assets at RBC Direct.
  • $9.95 if you make between 30 and 149 trades per quarter.
  • $6.95 for those super-active traders who do at least 150 trades per quarter.

Annual account fees

  • No fees if total client assets are $15,000 or more.
  • If assets are less than $15,000, a $25 quarterly fee will be charged regardless of the number of accounts.  Can be avoided by making three or more trades in all accounts

Other discount brokerages reviews

Questrade discount brokerage review.

Categories
Personal Finance

Happy New Year and Stock Picks For 2009

Happy New Year to all our readers – last year was a tough one in the markets but I can’t complain.  My financial situation is better now than it was last year thanks to some aggressive mortgage paydown.  In other areas of my life – our son is a year older and is healthy, happy (most of the time) and doing very well.  We also celebrated the birth of our daughter in March who is also healthy, happy (most of the time) and progressing quite well.

I also started a new site called ABCs of Investing which deals with very basic investment terms and concepts using 2 short posts per week.  A sample post explains exactly what the top down investing method is.  Alternatively, a bottoms up investing style might be more to your liking.

A special thanks goes out to Mr. Cheap who bought both my son and daughter a share of BMO each and created a DRIP.  A very generous gift and very time consuming as well to set the DRIP up.

So even with the crappy markets – 2008 was a great year!

Stock picks

I entered into a stock picking contest with some other bloggers – who shall rue the day they decided to do battle with Four Pillars!  🙂

Traditionally, the only way to do well with stock picking contests is to swing for the fences and hope for the best.  With that in mind I picked 4 small Canadian oil stocks which have been beaten down quite a bit.  If oil rebounds next year then these stocks should perform quite well.  There are probably better plays on the price of oil but this is the best I could do on 3 minutes of research.  Keep in mind these are pretty much random selections – do not consider this a recommendation or any kind of advice!

BCF.to – Bronco Energy $1.27.  I started watching this stock a few months ago when it was trading at $10 (it’s now less than $1.50).  My Dad saw some analyst recommending it on BNN – great call – down 85%!

HOC.to – Holly Corp  $3.65

TOG.to – TriStar Oil and Gas  $11.41

CLL.to – Connacher Oil Gas  $0.74





The other competitors (click to see their picks)

The Wild Investor stock picks

Zack Stocks stock picks

Dividend Growth Investor stock picks

My Traders Journal stock picks

Where Does All My Money Go stock picks

Intelligent Speculator stock picks

The Financial Blogger stock picks

Million Dollar Journey stock picks


Categories
Personal Finance

Best Free Canadian Rewards Credit Card Award Goes to…MNBA

A while ago I wrote how I used to have a Visa Aerogold credit card which might just be the worst Canadian rewards credit card ever.  I finally made the switch to a no-fee rewards card called the CIBC Dividend Visa which is ok – but it’s not as good as the MNBA Premier Rewards Platinum Plus Mastercard.

1% cash back reward

The main thing I like about this card is the fact that it pays 1% cash back on all purchases from the first dollar.  The Dividend card that I currently own has a sliding scale so I only earn 1% cash back after spending $3,000 annually.

No annual fee

After paying $170/year for the Aerogold – I will never pay annual fees again.  This card has no fees of any sort.

Car insurance and extended warranty

Another great benefit of this card is that it provides extra insurance for car rentals so you don’t have to pay extra for collision when renting.  It also provides extra warranty for most purchases.

I’m signing up

This card looks good to me so I’m going for it.  If you want to sign up for the card then feel free to sign up through one of the affiliate links on this post.

Categories
Book Review

Book Review: Outliers by Malcolm Gladwell

I first heard about Malcolm Gladwell’s new book, “Outliers: The Story of Success” about a month ago and was delighted that he was putting out a new book. I was wildly enthusiastic about “Blink” and “The Tipping Point” and after reading an extract online I couldn’t wait. By a happy coincidence, a friend gave me an early Christmas gift, and it was Outliers!

In “Blink” Gladwell looked at very fast cognition (things your brain processes in the blink of an eye). In “The Tipping Point” he looked at what led to ideas propagating and spreading through society (why some take off and why some die). In this book he looks at incredibly successful people (they’re the outliers) and argues that there’s more behind their success than the myth society tells us about them (that they’re naturally brilliant & gifted).

As with all of Gladwell’s work, he’s a delight to read. He takes an interesting idea, chews away at it, and presents his thoughts, building a surprising, yet plausible, model around them. In “Freakanomics” they debunked one of the big ideas he argued for in “The Tipping Point”, so that’s the one danger of Gladwell’s work: he’s very persuasive, even when he’s wrong.

The idea behind this work is that people who are great at something (we’re talking world class talent) are great primarily because of the time they’ve invested, rather than an inherent ability. A certain threshold of “raw ability” is necessary (which is lower than you’d think), but beyond that it’s often luck whether they managed to accumulate the time required to become world-class. The time investment, he argues, that’s needed is 10,000 hours, and its often circumstance that determines whether someone who has the interest to invest that amount of time is also given the opportunity.

He gives examples supporting this from violinists at an elite Berlin music academy, Canadian hockey players, high-tech entrepreneurs, and the Beatles (apparently they’re some minstrels from England achieved a bit of fame a long time ago).

Following up on the lucky circumstances, he also builds the case that even a small lucky break early on compounds as someone who has shown an “early aptitude” is given more opportunities, which leads to an increase in aptitude, in a reinforcing cycle until they accumulate the hours to become good or extraordinary at something. He argues that the reason Chinese people are often good at math is because Mandarin has a cleaner, more regular syntax for naming numbers. This gives young Chinese students a leg up when they first start learning math, and they’re able to build on this lead (and have a positive first experience with the subject).

He presents counter examples of Lewis Terman’s study of high IQ students (they tracked the top 1% of the top 1%) in California, who didn’t really amount to much as a group (and even within the group, socio-economic status was a better indicator of success than their IQ). Terman’s study rejected two boys as not smart enough to participate who went on to win Nobel prizes.

The take-aways from the book were that if you want to be really good at something, you’ve got to put in the time (along with meeting SOME requirements, you’ll never play in the NBA if you 5’3). You’re fooling yourself if you think you’ll just naturally be world class at something. The trick is to keep practising, and the people who will excel are those who find the motivation to keep at it. If you want to excel in your profession, put in the time at the activities that are important to it. If you want to learn a new skill, put in the hours of study and practising. There’s no royal road to excellence.

I highly recommend putting this book on your Christmas (or Hanukkah, or winter’s solstice) list. Its a fun, fast read.

I kept wondering if he’d mention an age limit, but he didn’t, so maybe it’s still possible for me to get cracking on my 10,000 hours and win a gold metal in Olympic gymnastics!

Categories
Investing

Comparing Market Cap ETF vs Dividend ETF – How Much Duplication?

I had a reader question the other day where they mentioned buying both XIU (iShares Cdn Large Cap 60 ETF) and XDV (iShares Cdn Dividend Index Fund ETF) for their portfolio.  I had responded that although I wasn’t sure, I suspected that might be a lot of duplication in the two funds since XIU has all the biggest public Canadian companies – a lot of which are good dividend stocks and would probably also be in XDV.

Duplicate holdings is a common problem in mutual funds – especially in a market like Canada where there are not a lot of different companies to buy for the larger funds.

I decided to do a bit research and find out if there was as much duplication as I suspected in the two funds.  The question I want to answer is if it is worthwhile to own both funds for diversification purposes or will just one do.

Number of companies in common

The first and simplest criteria was how many companies are in both ETFs.  This isn’t necessarily all that meaningful since one ETF might have a lot of XYZ company whereas the other might only have a small holding.

XIU 60 has 61 holdings (can’t they count?), XDV dividend has 31 holdings, there are 15 companies that they have in common.  This seems like quite a bit since it means that half of the companies in the dividend ETF are also in the XIU ETF.

Amount of market cap in common

What I did here is take the companies that are in both ETFs and compare the percentage holdings and add up the smaller number.  For example if CIBC was 9% of the dividend fund and 5% of the XIU then I counted that as 5% in common (by market cap).   This totalled up to 31%.  This was a smaller number than I expected which means that a good portion of the dividend ETF is not represented in the XIU 60.

Measuring correlation between the ETFs

The next test I did, which should have been the first and only test since it is the only one that has any real meaning is to measure the amount of correlation between the two ETFs.   Correlation is a measure of the relationship between the prices of the two ETFs.

A measure of 1 means that they always move in price exactly the same way, a measure of 0 means they are completely uncorrelated and a measure of -1 means they always move in price in exactly the opposite direction.  One of the main concepts behind building a portfolio is to try to find different assets that are not correlated with each other.

To accomplish this I needed some historical price data which I managed to find at Yahoo Finance.  To figure out the correlation I used the Excel correl function (is there anything Excel can’t do?).  XDV dividend has only been around since the end of 2005 so the data is only for a bit less than 4 years.  Not being a stats guy I’m not sure if this is a long enough period to be meaningful but it’s all I’ve got.  Regardless, the correlation “r” number was 0.72 which implies some benefit for diversification but not a whole lot.

Performance

The last thing I looked at was performance.  Since the time period is fairly short I’m not looking to see which ETF did better but rather to look at the difference in performance.  Ishares.ca website has a handy calculator just for this purpose.  I choose the last 3 years since the next category was 5 years which wouldn’t work for XDV dividend.

3 year total return

  • XIU Large Cap 60 = -12.98%
  • XDV Dividend = -18.19%

From what I’ve read the XDV dividend has a higher ratio of financials than the XIU 60 which is probably one of the reasons for the big performance difference.  The XDV dividend has a higher mer (0.5%) than XIU 60 (0.17%) which would account for about 1% of the 5% difference.

Conclusion

I looked at 4 categories to see how different XIU and XDV are:

  • Similar companies – half of the XDV dividend companies are in XIU.
  • Similar companies by stock market capitalization – 31% of the companies market cap are in both ETFs.
  • Correlation – over the last 4 years the correlation is 0.72.
  • Performance – the two ETFs were about 5% off in terms of total performance over 3 years.

What does it all mean?   Hard to say – there are much better ways to diversify your portfolio – REITs, small cap, foreign holdings would likely all have correlations that are less than 0.72.  I’m also not crazy about the higher mer of the dividend ETF.

I think if you want to have most of your equity in Canada then buying partially overlapping ETFs might be the only way to diversify without getting into individual stocks.  Personally I like to be diversified over the whole world so for me, the XIU Large Cap 60 by itself is good enough – in my case adding XDV would not increase my diversification enough to make the higher mer worthwhile.  XIC (TSX 300) is also a good choice.

Categories
Investing

Will A Big Canadian Bank Fail?

I have to admit that while I haven’t been bothered by the falling markets, today I found it a bit tough for some reason.  It seems like every day the market falls and if it’s only 1 or 2% then that is ok.  Well today the Canadian market fell 9%.  9%!!! That would be a bad year by itself and it was only one crappy trading day of many crappy trading days.  The worst part was the banks – they have been pummelled this year and today the big 5 went down by an average of almost 13%.  13%!!! Very depressing I thinks.

Now, I haven’t gone all anti-Bernstein or anything – I have no plans to sell any equities under any circumstance.  What my concern is now is will one of the big Canadian banks fail? Here are some things I’m worried about:

Canadian banks own bad US mortgages as well

Our banking system was recently named as the best in the world.  Our lending standards were much stricter than the US banks so everything should be ok?  The only problem is that from what I understand, the US banks got in trouble buying investments containing bad mortgages – it wasn’t necessarily all just from writing bad mortgages themselves.

The problem is that the Canadian banks also bought these same investments and have been slowly taking related writedowns all the while not talking about what their real exposure is.  These investments were enough to bring down some big US banks so why can’t they bring down a Canadian bank?  Yes, the Canadian banks have good business models so did Washington Mutual and Wachovia.  They had customers, lots of assets – a normal bank in other words – but they lost it all on the investment side.

A bad dividend trend

The thing that concerns me is that the US banks I mentioned all paid a dividend at one time.  When the stock went down the dividend yield went up…and up and up and up.  First there was a dividend cut and then the bank went out of business.

The dividend yields for the Canadian banks in order are:

  • BMO 8.4%
  • CIBC 7.3%
  • BNS 5.9%
  • Royal 5.6%
  • TD 5.4%

The ones that really stand out for me are BMO and CIBC – 7 or 8% dividends that don’t pay return of capital are too high.  Either they are mispriced or investors are expecting a dividend cut.  Now we haven’t seen the double digit dividend yields enjoyed by the US banks before they went belly up but the yield on BMO and CIBC has roughly doubled over the last year or so.

Summary

I really hope that none of the banks go under but I am concerned about it.  Can anyone please tell me that I’m wrong??

Categories
Personal Finance

Tax Free Savings Account (TFSA)

The Canadian government recently announced a new type of tax-free savings account (TFSA) available to Canadians which is similar to the Roth IRA account available to Americans. Here are some of the details:

What is the TFSA?

A type of account where you make contributions but don’t get any income tax refund. While the money is in the account there are no taxes applied to any kind of earnings such as interest, dividends, capitals gains. Any withdrawals from the account are not taxable and won’t count against any government programs ie GIS, OAS.

How does the TFSA work?

  • You can contribute $5000 per year to this account for the years 2009 to 2012 and $5,500 for year 2013 and beyond.
  • The contribution room is carried forward.
  • No taxes on any earnings.
  • No taxes on any withdrawals.
  • When you withdraw money from the account, the contribution room available gets increased by the amount of the withdrawal – please note that this new contribution room is not available until the following calendar year.

When can I open up a TFSA account?

January 2, 2009 was the first day you could deposit funds into a TFSA.  Most institutions allowed customers to set up accounts prior to this date however.

Why do I want to open a TFSA account?

Any money that you might be saving for emergencies or upcoming large purchases will have a constant tax drag in an non-registered account. With the TFSA, this tax drag no longer exists so you will end up with more money for your purchase or emergency.  Here are some more benefits of the Canadian tax free savings account.

More information on the TFSA

Tax Free Savings Account (TFSA) Basic information for Canadians

TFSA contribution limits

TFSA Over-Contribution Penalty Fix

Tax Free Savings Account refresher for Canada

ING offers TFSA refresher for Canadians

Using the Tax Free Savings Account (TFSA) for Canadians as an emergency fund