Air Miles Blows

I have blogged about Air Miles a few times. I am seriously thinking about getting rid of Air Miles once we use up our remaining miles. We tried to use up half of them for some upcoming flights but once again, they did not have flights that worked for our schedule. We even called over 3 months ahead of time. This is the third or fourth time this has happened. This just makes me detest “Rewards Programs” even more. Some of the other tricks they do include making the flights worth more per mile than the non-travel items (such as gift cards and other merchandise). This makes it psychologically difficult to go after the non-travel items since they are valued at half the cost per mile compared to flights (sometimes worse). Seriously, on my last statement from Air Miles I got like 100 miles. Their statements are sent quarterly and 100 miles is worth like $10-20 depending on what valuation you use. So that’s like less than $10 a month. Are you f$cking kidding me? The only way to get serious miles is to rack up seriously huge credit card statements or shop like crazy at Air Miles retailers, which we are never going to do. So they pay me less than $10 a month so I can go through this hassle of calling Air Miles every time I want to fly to see if they have any flights I want (which they never do), carry an extra card in my wallet, receive an extra statement, and waste my time writing a blog article about it. No thanks.

TD Waterhouse Lowers Commissions, E*Trade Still Not Offering Wash Trades

For those who don’t know what a wash trade is, a wash trade allows you to convert a holding in USD into another holding in USD without having to switch to CAD first.

After reading Canadian Capitalist’s post about TD Waterhouse Lowering Their Commissions, I posted this comment on his blog:

I just sent an email to E*Trade asking them when they are going to start offering wash trades or the ability to hold US cash in an RRSP. Everyone who has an E*Trade or questrade account, please bug them about this. I hope hoping this move by TD will cause the others to become more competitive. I do not want to move from E*Trade as it is a pain but I will have to in a few years if they don’t react at all.

By the end of the day, E*Trade had gotten back to me (as they have before when inquiring about this). Here was their reply:

Thank you for choosing E*TRADE Canada.

We are always looking for ways to increase customer satisfaction and attract new business and we realize that Wash Trades are something that clients want. With that being said, there is no specific time frame of when this will be offered through E*TRADE.

We are aware of TD Waterhouse’s new commission rates and we strive to be competitive. I will however mention some of the other benefits that are exclusive to E*TRADE, such as our high interest Cash Optimizer Investment Account, free Research from 5 independent resources, and our no fee, no minimum RRSP accounts.

So they aren’t totally clueless and they aren’t totally ignoring me. But that fact that there is no timeframe is a bit annoying. If they have a half-decent team of developers you would think they would have some idea of when this could be implemented. Maybe it’s that management has not okayed any resources for it or something. Well maybe now they will.

Update: Today I got another email from E*Trade, this time from a different person. So maybe my email got forwarded up the chain of command. Here it is:

Thank you for choosing E*TRADE Canada.
We have a plan to set up a system so that you do not have pay FX for buying and selling US stocks in rrsp account. But
we do not have any expected time frame yet. Please feel free to call us anytime from 8am to 12pm 7days a week, if you need further assistance.

I hope they can do this. This will be even better than wash trades.

Ask Dave: Send Me Your Questions

I have posted a few blog posts with “As Dave:” in the title with the forethought that it might turn into a regular thing. Since I enjoy writing these kinds of posts, I have decided I would like to make it a regular thing. Maybe I will try to put out one weekly if I get enough questions. It provides me with some motivation to blog and I enjoy hearing about other people’s situations. So please send me your questions, get them answered, and help me create some great “Ask Dave” posts! Please send your questions using my contact form below.

Ask Dave: Switching to an Index-Based Portfolio

Dear Dave,

Firstly, I wish to compliment you on your excellent blog. Your posts are simple and they have certainly helped me navigate towards a passive portfolio. Please keep up the excellent work.

Why thank you! Keep reading, tell your friends. And sorry for taking so long to respond to this, I’ve been quite busy.

I know that you are not in the business of giving financial advise, but I was wondering whether you could provide some guidance, or post on subjects related to my current situation. I am a relatively young investor, like you, (25) who now has a steady job and am looking to invest for the long term. I have been investing for a while now and have built up savings of, let us say a fictional $100,000, primarily of mutual funds, including some index funds. I currently use TD Waterhouse’s self-directed brokerage.

My portfolio is as follows:

TD Canadian Index-e
TD Monthly Income
TD Balanced Growth
TD Dividend Growth
Canadian – 12%

TD International Index currency neutral
Cundill International Value
Trimark Fund SC
International – 26%

Vanguard Total Market E.T.F. – VTI
RBC O’Shaughnessy US Value
US – 13%

TD Latin American Growth
Emerging Markets – 2%

GIC (one year, 3.75% matures in Dec. definitely can cash this earlier)
Corporate Bond ($160 a month)
Fixed Income, Bonds – 43%

Cash – 4%

Reminds me of my old portfolio at TD Mutual Funds (not Waterhouse, I had a mutual fund-only account at TD, used to be called TD Greenline Mutual Funds). Lots of funds with a lot of the same holdings; I had TD Canadian Index-e, TD Balanced Growth, TD Dividend Growth on the Canadian side. 3 International funds, 2 US Funds, etc… As my former advisor said to me “with so many mutual funds, what you’ve got is basically an index but with a high MER.”

Most of my portfolio is outside of an RRSP (20% is in RRSPs – I cannot really contribute much more to my RRSP). So if I wanted to switch my actively managed funds into ETFs, how should I do it? I am aware of the early redemption fees, but aside from that, do I just sell them and take that big chunk of cash and buy my proper allocations of ETFs? Are there tax consequences that need to be thought about? I know your thoughts on timing the market, so should I just buy everything I need on one day (the VTI I bought at $150 a couple weeks ago, and I know I shouldn’t even think about it)?

First of all you can do the switch to ETFs outside or inside, and you won’t incur any more costs either way. If you do it outside, you can transfer them into your RRSP later “in-kind” without having to sell them. As far as the tax consequences go, outside an RRSP you will have capital gains (losses) to pay taxes on if you sell anything, or when you transfer them into an RRSP. I think when I did it a long time ago, I sold them outside the RRSP and incurred a capital gain, and when they were sold they went into my linked bank account. I then moved that money into an RRSP cash account and then bought investments from there. I was selling and buying no-fee mutual funds outside and inside respectively so I didn’t incur any costs. I think the only tax consequence you should really worry about is to maximize your RRSP contributions every year and that’s about all you can control. Of course, since you are probably planning to keep VTI inside your RRSP, just transfer the VTI in-kind and you will incur a capital gain (loss) on any gains (losses) since you bought it.

Next, don’t switch all those things into ETFs if your commissions are going to be huge relative to the size of your portfolio. If you are going into 4-5 ETFs and the total commission is going to be about $100, I would say that if your portfolio is $10,000 or more, go ahead.

As for your timing try not to even worry about what the market is doing. Pick an asset allocation that you are comfortable with and then go with it. Switch all at once to a new allocation if you want.

With RRSP space that I do gain each year, which investments should be prioritized to be bought within an RRSP?

I guess if you don’t have the RRSP space for everything yet, it would make sense to put non-Canadian stuff into the RRSP first. The Canadian stuff doesn’t suffer from as much double-taxation as the non-Canadian stuff. I cannot remember what the difference in taxation is between dividends and capital gains (I don’t have any non-RRSP investments at the moment, just some debt :-)) but it’s probably not enough to worry about.

(Aside: when I say double-taxation, I mean that money outside an RRSP is taxed once (as income on your paycheque) and then again when it earns interest or realized capital gains, whereas inside an RRSP it is only ever taxed once (as income).)

It seems that my allocation for bonds/fixed income is too great, but that is only because I did not know exactly how to allocate it, in the end, I only want about 20% bonds.

How did you feel about the recent market downturn? Were you glad to have so much in bonds/cash? If so, keep your current allocation. If you didn’t care too much and think that you could have suffered more and not cared, go with less. Just don’t worry about timing. If you switched to more stocks now, the equities market could continue its fall over the coming year. If you keep your current allocation, the equities market could just as easily bounce back over the coming year as well and you might miss it. You cannot even hope to predict the future.

I recently thought about my emotions during the recent slide, and in retrospect I kind of wished I had a little bit more bonds/cash than the 20% I have (maybe 30%?). I am going to add 5% REITs to my portfolio eventually, so I will eventually have 25%.

I was doing a systematic investment plan where money was taken out and a number of the mutual funds were purchased on a biweekly basis. Now I have stopped the plan and will accumulate money until there is enough to purchase the right ETF (VTI, VEA, VWO, XIC).

I used to do what you did with mutual funds as well. Biweekly, and I would purchase several different funds. Now I also save up cash in my RRSP until I have enough to buy an ETF. I usually wait until. I have $2000. Since I pay commissions of about $20 that means the commission will be 1% of the purchase amount.

I know this is a long rambling post, but any guidance you might be able to share, even if not directly but through future postings, would be much appreciated.

Market Meltdown Survival Guide

Markets all over the world seem to be tumbling and the media is in a frenzy. I know my portfolio sure has taken a beaten (the equities portion at least). I’m not going to be doing anything differently. My focus is entirely on my asset allocation and sticking to it. No selling, and buying as soon as I have enough cash build-up from monthly contributions to buy an ETF while keeping the commission at <1% of the purchased amount. You might be considering buying now as the market might flatten out and rebound upwards; but it might instead go down further. You might be thinking about waiting on the side lines for a while until we really hit bottom; but it might rebound sooner than you think and you will miss out on all those gains. Do not succumb to this kind of thinking. Remember that every day the market will do something fairly random that you cannot predict. Just make regular consistent contributions and purchases and you will end up buying at random prices and everything will even out. Or, in general, if you are investing for the long term do not change your investing behaviour based on what the market is doing day-to-day or month-to-month. Hopefully your investing strategy over the past year was such that nothing about your strategy will change now that market is correcting. Ok, so this isn't really a guide; but there isn't really much to it. You don't really need to do anything because if you are investing properly for the long term a market meltdown is a non-event.

Vanguard Europe Pacific ETF

The Canadian Capitalist mentioned today how he substituted EFA for VEA, a new ETF from Vanguard. The Vanguard Europe Pacific ETF (VEA) is almost identical to iShares’ EFA, which follows the MSCI EAFE index. This is so cool, and its MER is 0.20% less. Not a huge deal, but hey, why not go for VEA over EFA. Looks like Vanguard has the complete offering of ETFs now.

I’m currently in XIN, the Canadian-dollar traded version of EFA. I was thinking of switching to EFA the next time I plan on making a purchase of XIN/EFA (which will probably in 3-6 months time), so I’ll probably go with VEA instead. The bulk of my portfolio will be made up of VEA and VTI, along with XIC, VWO, XRB, and XSB. (Probably phasing in some XRE later too).

Cramer Loses It

Has anyone else seen the video of that nut job Cramer losing it? Basically he wants a rate cut and thinks that the Fed should bail out the banks who dolled out sub-prime mortgages at teaser rates. On the other hand, if the Fed does cut rates, the US dollar will collapse even further, and lead to higher inflation for everyone. Essentially, imposing a “hidden tax” on the American people in order to bail out some banks. Well, that’s how I understand it anyways, after doing a little reading about from various for and against sources.

The Fed cannot be absolved of all blame of course, they dropped the rates hard and fast in the first place, which got the US into this mess. Here’s what some other people over at had to say:

Instead of immediately absolving home-buyers of blame, remember that a lot of these assholes WAY OVERPAID for their homes, failing utterly to demand value for their money or use sound judgment. As a result, prices exploded to obscene levels and now many many people can’t even consider buying a home.

It’s hard to feel too sorry for people who screwed over a great many others by falling all over themselves to bid MORE THAN ASKING PRICE for mediocre homes. Had they stood up for themselves and for value, we wouldn’t be in this shitty situation.

This was just another symptom of the plummeting standards and intelligence of our society. You want to talk about “values”? How about starting with the value of a goddamned dollar?

I can’t help agreeing with that, seems like common sense. Here’s another:

I remember two years ago when everyone was going crazy in the market and people thought I was crazy for renting. I still rent today, I like having the space, the lower monthly payment, and generally a nicer place than I could afford to buy. People would ask me, “how much does this condo costs??” I would say, it’s not a condo, it’s an apartment, and they would give me that smug look and a snicker and say “Ohhh, you still rent??”, like I was too stupid or too poor to buy a house. Now all those people have those half a million dollar “investment properties” they can’t sell because they bought in an over-saturated, over-valued market. And to add insult to injury they also have a million dollar condo on a variable interest rate loan… me? I pay they same rent I did four years ago, who’s laughing now?

Sounds like he’s in the same boat as us. Happy to be renting, and annoyed when people give you that “ohh, you still rent??” deal. There was a reply to that comment:

And you have accumulated _NO_CAPITAL_ in the time you’ve been renting. This “renting is a better financial option” talk always burns me, go back to “sound financial planning 101” and you’ll know that 99.99% of-the-time, paying your own mortgage is better than paying one for your landlord.

“Who’ll be laughing” is me in 15 years. When my house is payed for, and Ive got a $250,000 asset and youve got zilch. In fact, Ive currently got a renter in my first (fully paid-for) home, paid $150k and now making $12,000 PA in rent — a Dead-Solid secure investment making ~7% income PA.

You enjoy your “extra space”, and when home _BUYERS_ are enjoing their lifetime of sound financial planning (read: Houseboat on Lake Tahoe/Cottage in Muskoka/Porsche) you can tell us all how rent was such a wise investment…

This is totally flawed reasoning. The renter in all likelihood accumulated capital as well, through investments, if he is as smart as he thinks he is. This is one of the biggest myths about real estate: that all renters accumulate no capital, which is utterly false. It is true that some renters accumulate no capital but it is also true that some renters accumulate lots of capital. Many people who buy a home especially when they are young (as many did in this market) cannot afford to make other investments (besides their home), so they tend to forget that other investment options (stock market, bond market inside or outside of an RRSP) even exist. Of course there are renters that blow their extra cash on beer and popcorn and a home makes a great forced savings plan. Oh, and here’s a real life example for you in case you still are not convinced: for the past year my wife and I were paying $1050 in rent and putting $1750 into our RRSPs per month. Our financial situation has changed a bit now, our rent is higher at our new place and RRSPs haven’t gone up much yet but we are actually still putting in more in our RRSPs than our rent. Ok, back to more comments:

If Bernanke cuts rates, China et al will have less incentive to continue to buy up treasuries at lower interest rates, and that’s presently the only thing keeping the dollar from falling through the floor. Therefore, Cramer is asking Bernanke to save his buddies’ asses at the expense of the $ itself (ie, at the expense of EVERYONE). My guess is Bernanke will stand pat, since it’s easier to deal with one Cramer than 300 million.

As for Cramer, he himself predicted the hedge fund implosion in this more sane commentary:
…so for him to scream that the sky is falling is flip-flopping of epic proportions. If Googling “failure” brings up links to Bush, then I’d say Cramer should be near the top of the search results for “douchebag”.

The article above is somewhat interesting and explains some of what is going on but I have to a admit I don’t quite understand all of it. Here’s another comment:

It’s funny how the “free market economy” should apply to all the companies out there, until the banks are in trouble. Then the government should step in to bail them out. Hundreds of thousands of jobs have been axed because of leveraged buyouts and takeovers in the last decade while the brokers and bankers made fortunes. Now we’re supposed to take it up the rear again just because they made some bad bets? Screw that.

iTulip made a great video calling Cramer for what he is, go check it out:

I’m not shilling for iTulip, I just think they can see through Cramer’s bullshit better than most.

Check out the iTulip video. And another:

This happens every time banks get into trouble (and they always eventually get into trouble). Banks lend out money. If lending standards are slackened, like they have been for a while, banks lend money to anyone, with little oversight. Eventually those loans turn sour, like they are doing in the subprime mortgage business. The banks are then caught short and don’t have the money to continue operating. In the Bear Stearns case we’re talking about two hedge funds that they’ve had to close, which is in turn affecting the parent company. So after a bank is facing a run on what little it has in deposits by creditors they’ll turn to the Federal Reserve, which is itself a cartel of banks. At the Fed a bank can be lent money to stay in operation. Also if Congress gets involved through pity they can authorize the Fed to give that other bank money interest free. The problem with this is that the Fed creates money out of nothing and in so doing they dilute the total pool of dollars in circulation which causes our dollars in our pockets to be worth less and less, this is known as inflation: the value of money goes down in relation to other commodities. So don’t believe people like Cramer or your Congressman or the Fed who will say that Government needs to bail these banks out. It’s a lie. They want to saddle the American people with a hidden tax (inflation) to solve their ill-conceived business practices.

Finally, does he really need to scream his point like that? I mean who can take that seriously?