Questrade Discount Brokerage Offers US Dollars In RRSPs

Big news in the Canadian discount brokerage world today when Questrade announced that they will be the first Canadian brokerage to allow US dollars in rrsp accounts.

What this means is that you can transfer US$ money to your rrsp without going through currency conversion which costs 0.5% at Questrade and usually more at other brokerages. The other benefit is for selling and buying equities that trade on American stock exchanges. This would include any US stocks as well as all ETFs sold by American companies such as Vanguard. Previously when selling the US$ equity the money would get converted to Canadian dollars and then you would have to convert again to buy another US security thereby paying the currency conversion fee twice.

I’ve read of various customer complaints in blog world but I have to say that I’ve been quite pleased with their service. I have my rrsp as well as my open account with Questrade mainly because they have by far and away the lowest commissions available at $4.95 per trade for trades of 495 shares or less.

You can read my previous posts on Questrade here and here.

If you want to sign up with Questrade then feel free to use this link or just use “FourPillars” as the referrer when you fill out the application. For other bloggers feel free to sign up for the referral program and of course use “FourPillars” as the parent affiliate.


Questrade Referral Promotion

Questrade discount brokerage in Canada has a new referral program where you get $50 worth of trades if you are referred by another customer. The basic program has been around for a while but they have improved the referral process.

Lowest Stock Trading Commissions!

Feel free to use this link when you fill out the application. For other bloggers feel free to sign up for the referral program and of course use “dc988dd9” as the referrer ID.

You can see what I wrote a while ago about Questrade here.

Why I like using Questrade for trading stocks and exchange traded funds

I use Questrade for my non-registered leveraged account as well my rrsp and I’m quite happy with them. My attitude about brokers is that their service is a commodity in that they all do the same thing – they convert your money into shares and vice-versa so the only variable as far as I’m concerned is the cost. As a low cost investor I want the lowest fees and for my situation, Questrade has the lowest fees.

Questrade also deals with mutual funds -they will rebate up to 1% of the management fee back to the investor.  Read more about the Questrade mutual fund rebate.

The minimum to open an account is $1000. The minimum to keep an account active is only $250.

My suggestions on which discount broker to use:

If you are looking to do a lot of rrsp “wash trades” then Questrade and TDW are your best bet. A wash trade is when you sell a US$ security in your rrsp, it gets converted to CDN$ (and you pay a currency conversion on it), and then you buy a US$ security and you pay the currency conversion again. They do not charge for the conversions in this case.

If you are looking for a discount broker that offers a lot of extras like fancy graphs and research then you should stick with the big banks. But consider that for $29/trade (if you don’t have $100k) you are paying a $24 premium per trade for that extra research, bells, whistles etc. Even if you only do 10 trades per year that’s $240 per year. There is a lot of research available for free on the internet and $240 will buy quite a bit of the paid research (or a lot of beer).

If you are looking for more information on mutual funds, index funds and ETFs then sign up for a Morningstar free account.  Morningstar is the industry leader in investment information.


Indexing My RRSP

I recently moved my rrsp account from low cost mutual funds to Questrade where I bought some ETFs. I thought I would share the experience with you since I learned a few things during the process.

My plan was to buy four ETFs:

  1. XSB – ishares short term bond (Cdn $)
  2. XRB – iShares real return bond (Cdn $)
  3. VTI – Vanguard US equity (US$)
  4. VEA – Vanguard Europe and Far East (US$ to buy)

I described in a previous post about my first efforts at completing an equity trade. With this solid background I figured I’d be in better shape this time.

If you check out my post on my planned asset allocation you’ll notice that this portfolio is incomplete. That’s because we have several investment accounts so this one doesn’t represent the entire asset allocations. Once I get all the accounts figured out then I’ll post on the final asset allocations.

My goals for this exercise was to try to buy as many shares as possible and minimize the amount of cash in the account and to try to get it over with quickly. I didn’t want to have to spend a lot of time at work trying to get the best price for each security.

I started off with the Canadian purchases. This turned out to be a minor mistake because for some reason I thought that once I purchased the Canadian securities I would phone Questrade and get the Cdn$ converted to US$ and then buy the US$ securities. In actual fact when you buy US$ securities, you put the order in and then the dealer converts to US$ when the trade gets filled. The problem is that since you don’t know the exact currency conversion rate in advance you can’t utilize your last few dollars properly when buying a US$ security since you don’t know the exact maximum number of shares you can buy.

I used only limit orders which are market orders with a limit on them ie if you put in a buy when a stock is trading for around $50.00 with a limit of $50.50 then you will get the market price but only if it is less than or equal to $50.50.

Anyways, on with the trades…

XRB – The ETF had gone from $18.49 to $18.50. I put in a limit order for 700 shares with a limit of $18.55. It was filled immediately for $18.49. Very successful trade!

XSB – This one caused me a some trouble. This one has very slow trading activity so unless your order gets filled right away it might take a while. The last order was $27.97, I put an order for 1050 shares with a limit of $27.98 – first mistake – I should have had a higher limit. Second mistake, I didn’t put in a “all or none” order and 50 shares got filled at $27.98. The price drifted up during the day so my 1000 shares remaining with a limit of $27.98 couldn’t get filled. The problem was that I was already looking at one commission for the 50 shares so if I cancelled the remaining order the I have to pay a second commission. Luckily the trades are cheap at Questrade because by the end of the day the order had expired. The next day the last trade was $28.03, I put in my order of 1000 shares with a limit of $28.05 – filled right away.

VTI – this ETF had the higher share price so I bought it next. Last trade was $146.17 so I put in order for 350 shares with limit of $146.20. The price went up quickly to $146.20 so I had to wait about 15 minutes and it was filled at $146.20.

VEA – my problem with this order was that I didn’t know how much money I had in US$ – I called Questrade to get a recent conversion rate which I used to approximate the amount – I decided to go for 1000 shares. Last trade was $47.29, I put in order for 1000 shares with limit of $47.32 with all-or-none to prevent partial filling. Price went up for a while but it got filled about half an hour later at $47.32.

The next day I checked my cash balance and I ended up with about $900 in cash. This isn’t a big deal since these ETFs will be creating cash via interest and dividends anyways but if I could do it again, I would have left one of the Canadian securities to be the last trade so that I could accurately use up all my cash.

Anyways, it was fun buying these ETFs and I ended up learning quite a bit in the process.

Book Review

The Intelligent Investor by Benjamin Graham

Reviewing “The Intelligent Investor” is a bit like deciding to review “The Bible”, people perk up a little and think to themselves “it should be interesting seein *this* guy embarrass himself”.

Apparently Ben had some really good ideas about investing. Not just kinda-good ideas, but REALLY good ideas. They made him rich, and apparently Warren Buffet got himself up to the 3rd richest man in the world by following them (so, potentially there are two other people who are following better ideas, but books aren’t available about there ideas, and even if they were available, one of those books would be in Spanish).

One of the early quotes is that Graham changed the securities industry from secretive guilds operating like medieval alchemists into a modern discipline that’s based on proper measurements. He claims by analyzing companies by the numbers that its possible to avoid the market excesses that have led to bubbles and make nice returns on your investments.

Its interesting reading books written even in the fairly recent past and comparing them to recently published books. I wanted to read Adam Smith’s “Wealth of Nations” but gave up on the first page (bleh! anyone have a nice abridged version? ;-). At certain points in the book Graham’s writing style gets overly convoluted and I would have liked him to write plainly. I read the new edition with commentaries on each chapter, which were certainly nice to get a “just the facts” version of what I’d just read.

Two chapters just got so bogged down in details that I gave up and skipped ahead (“Four Extremely Instructive Case Histories” and “A Comparison of Eight Pairs of Companies”). While Dividend Matter‘s write ups, which include the Graham’s number for the value of companies, always seems very interesting and useful, as I read the book I really didn’t think it was for me (all the background research he repeatedly demanded you to do for each company beyond the numbers just seemed like way too much work).

In the end there were two simple ideas that he suggested and I latched onto. At the beginning of Chapter 14 he suggests buying a broad number of stocks from the Dow Jones Industrial Average such that you track the market (a footnote comments that you can now do this far more easily just by buying a low-cost index fund). The plan I’m currently considering is to use my RRSP to buy equal amounts of an DJIA index-fund and a S&P 500 index fund and rebalance them every time I add money to my RRSP.

His other suggestion, which is made as a throw-away comment (sorry, I can’t find the page number) was that a decent return could be made from buying long-term dividend payers that are selling for low prices (and he makes the standard caveat to make sure they aren’t selling cheap because of very serious issues that are threatening the company).

The three things I gained from this book were a) I’m probably not cut out for individual stock analysis so I should probably steer clear of bargain hunting through the entire market b) stock indexes are probably my safest long-term bet – since I was considering this anyway I should push forward with Graham’s blessing and c) there are worse ideas than buying cheap dividend aristocrats for income.


Why I Suck At Trading

I’ve come to the realization that I would not make a very good stock trader. The evidence leading to this conclusion became glaringly apparent when I made my first ever stock purchases over the last couple of months. Both trades were Bank of Montreal purchased for my leveraged stock plan.

After doing a bit of research on the mechanics of buying stocks along with practicing on the trading simulator at Questrade, I was able to get comfortable with getting the real time quotes and placing an order with a limit. The limit probably wasn’t necessary since I was buying board lots of a heavily traded company, but better safe than sorry.

The other part of being on the “buy side” was waiting for a dip. I had read in many books and blogs that the best way to accumulate dividend stocks was to “buy on dips”. It seemed pretty obvious that all one had to do was wait until said dip appeared and then let the trading begin! The only problem was an an extreme lack of patience on my part. Once I got it into my head that I was going to be buying some stocks then I kept a close eye on the price in order to identify a dip at which point I would pull the trigger. However due to the feverish excitement I was in, I ended up spending way too much time at work checking the price of the stock. I’m sure my co-workers were suspicious since I was spending a lot more time glued to my computer than I normally do. After a while I decided that dip or no dip it was probably better to pay a couple of bucks too much for the stock rather than lose my job because I was checking real time quotes all day long. The other problem I had was a constant irrational fear that the price would skyrocket and if I didn’t buy right away I would never get it for that price again.

I ended up buying the first 100 shares of BMO at $71 which was after the shares had been hanging around $68 for a while because of the trading scandal. The reason I couldn’t buy when the stock was lower was because I didn’t have the account set up yet and it took a while for that to happen. For the next trade I told myself that I would wait patiently until the stock hit the very bottom (wherever that is). But history repeated itself and I ended up buying 200 shares at $68.60 which felt a lot better than $71 but of course, better deals could have been had with a little patience.

Since my plan is to hold these shares for a long time, the initial purchase price isn’t all that important but the competitive spirit in me demands that I get the best price possible. I didn’t accomplish that goal with my purchases this time but I’m hoping that next time I’ll be able to stay cool long enough to get a good deal. If not, the dividend cheques will help make up for it.


Leveraged Investments – My Grand Plan

This is the first post in the “Leveraged Investments” series.

There has been a lot of discussion lately in blog world about leveraged investing so I thought I would add my take on the situation.I decided at the beginning of this year to look into the feasibility of using some leverage to buy dividend stocks.I figured with my long time line for this project, the favourable dividend taxation rates, and the tax deduction on the interest, that there was a reasonable chance to implement an investment plan which would eventually pay for itself from a cash flow point of view and provide an eventual net profit from the dividend flows and capital gains at the conclusion.

I have three posts prepared on this topic, today’s post outlines “the plan”, next post will cover all the risks (and there’s a lot of them) and some steps I’m taking to manage the risks, and the last post will look in depth at my analysis of my personal interest rate risk which includes my mortgage as well the investment loan.

The basic plan is to use my home equity line of credit to buy dividend stocks in a taxable account. Stocks would be Canadian dividend stocks, strong record of dividend increases, great companies.Safety of the companies is of utmost concern.

The main reason I was inspired to think of this plan is because of the incredible record of dividend increases that a lot of these companies have had (10% to 20% over the last 10 years).I’m well aware that this is an aberration however that’s what got me interested in this type of investment in the first place.

The other reasons I’m keen on the plan are because of the tax deductibility of the interest on the investment loan and the light tax on dividends. Another attraction is that if the plan is at least moderately successful, it won’t cost me anything to implement.

Here is a model of a scenario that I’ve analyzed.In actual practice I wouldn’t buy $100k all at once, accumulation will be much more gradual and I don’t have a specific upper limit.

Some numbers – my marginal tax rate is 43%, tax rate on dividends is 21%. I set up a model where I buy $100k of stock yielding 3.1% and the dividends increase 5% per year. Interest rate is 6% and never changes.All figures have been discounted to 2007 dollars using a 3% discount rate.

$6000 is paid in interest each year, $2603 tax rebate received each year.

In the first year the dividend income is $3100, after tax dividend income is $2449 so the profit for me is the interest – tax rebate – net dividend income = -$948 for the first year.

In the second year, the dividends have increased by 5% so the annual profit = -$826.

In year eight the annual profit is now positive at $49 and it continues to grow after that.

At the end of year 14 – the total of all the cash flows in today’s dollars add up to $436 which means that at that point in time, my overall cost at that point is zero and I have $436 in profit from the dividends.

By the end of the plan (25 years), the total of all the annual net profits/losses from dividends is $17,866 in 2007 dollars.To calculate the potential capital gain I took the gross dividend income in year 25 ($9,998), divide by 0.05 (I’m assuming a 5% yield) which gives me a $200k valuation of the equities.I calculate that if I were to sell all the stocks at that time and pay off the loan I would have a 2007 present value of $38,500.Adding the net dividend income + net gains gives me $56,374 in 2007 dollars.

Bottom line is that in this model I’m paying only $3620in today’s dollars over the first seven years to get things started. Even in year one, 84% of the interest cost is covered by the tax rebate and net dividend. By the end of year 8 my cash flow is now positive and by year 14 I’ve broken even in that the annual profits I’ve received from the dividends have paid for my initial costs.If the plan works exactly as the model does then I would make a profit equivalent to $56,374 in 2007 dollars.

You might have noticed that like most leveraged plans this one didn’t mention any of the risks involved….that will change tomorrow when I will go through every risk I could think of and how I’m planning to mitigate those risks.

Here is my spreadsheet for this model: Div Sheet

See the next post in this series “The Risks”.


My Portfolio – An Asset Allocation Decision

Last fall I sat down for the first time ever (after 13 years of owning mutual funds) and looked at all our investments and did an analysis to determine what our asset allocation was. As I recall we had over 90% equity and a good portion of that equity was in Canada. At that time I decided to make the equity/bond split to be 80%/20%. This was chosen somewhat arbitrarily although it seemed to be a good mix for a fairly aggressive portfolio with a long investment time horizon. I also changed the country mix in order to reduce the Canadian holdings down to about 30% of the equity portion.

At this point in time I will be revamping my portfolio once again since I decided to move about two thirds of our rrsp to a broker (Questrade) in order to convert it to ETFs. The remainder will stay in low cost mutual funds and GICs. I’ll be discussing some of the specific investments in future posts but I plan to start with the asset allocation since that’s the most important decision in my opinion.

The first asset allocation decision was to lower the equity portion of the portfolio down to 75% from 80% and to raise the bond portion up to 25%. I decided to do this mainly based on the research of William Bernstein (Four Pillars of Investing) which showed that having an equity portion of a portfolio higher than 25% wasn’t worth the extra risk since it usually didn’t result in a significantly higher return and of course results in more ups and downs with the market.

Interestingly enough Bernstein says that although 75% equity should be the maximum for an investment portfolio, 50% should be the minimum regardless of your age. The reason for this is that if you are retired and have a more conservative portfolio ( less than 50% equity ) then inflation is a bigger risk. Another great point he makes about asset allocation is that you should have a more conservative portfolio if you’re not sure if you can handle the volatility in a downturn. If you sell equities every time the market drops and then wait until it goes up before buying in again, then you are better off in a more conservative portfolio (ie 50/50) if that allows you to stay invested during the downturns.