Author Archive for Dave

Ask Dave: Choosing a Discount Broker

Published
by
Dave
3 months ago
in Advisors/Brokers and Ask Dave
. 3 Comments

Anthony asks:

I am reading about your move to ETRADE.

My question is a simple one…..did you research all the discount brokers before moving to ETRADE?

I am about to move my accounts, (they are sizeable), to a discount broker, and take care of them myself.
I just coundn’t figure the value I was getting from a full service broker.

Why did you go with ETRADE? And would you, or your readers recommend any one in particular?

I would really appreciate a reply directly to my email address, if you have the time,

Thanks and good luck,

No, I didn’t really do tons of research. I was paying $70 or something like that during my brief stint at a full service brokerage. E*Trade offered $20 per trade and I figured that there might be some other brokers out there with $10/trade, and there were some, but they were not names I had heard of before. E*Trade has been around for a while and I knew their name so I went with them. I didn’t really care about the details, I just needed some where to put my money after my financial advisor’s company got swallowed up by another company and he was (I assume) laid off. E*Trade does offer $9.99 trades if you have more than $50,000 in assets with them.

Rob Carrick recently compared online brokers in “With online trading, it pays to shop around“.

Popularity: 41% [?]

Dividend Stocks Inside vs. Outside an RRSP

Published
by
Dave
3 months ago
in Taxes
. 6 Comments

In this article, “Dividend tax breaks make blue-chips a wise buy” in the Toronto Star (linked from the Canadian Capitalist), Ellen Roseman says:

Buying blue-chip Canadian stocks can be a good strategy for do-it-yourself investors. I’m talking about the big banks, insurers, pipelines, telephone companies, gas and electrical utilities that pay dividends of 2 per cent to 4 per cent a year.

This is similar to what you earn on a high-interest savings account or fixed-term deposit. But if you hold these stocks outside of a registered plan, your income is worth more because of the tax breaks on dividends.

It almost sounds as if she is saying that, given the choice, you should hold dividend investments outside of a registered plan (RRSP) rather than inside. I think what she is saying is that if we just compare dividend stocks with interest-bearing investments such as term deposits and high-interest savings accounts, if they are both held outside of an RRSP, less tax will be paid on the dividends than on the interest from the other investments. However, dividend stocks should never be held outside an RRSP if one still has contribution room inside one’s RRSP. Putting dividend stocks inside an RRSP eliminates the taxes on the dividends. Instead, pre-income-tax dollars are invested inside the RRSP where it can grow tax free. The money is then taxed as income when the money is withdrawn later during retirement (presumably at a lower income tax rate). The double taxation of dividends/interest is avoided.

Popularity: 36% [?]

Just Bought a Car

Published
by
Dave
3 months, 1 week ago
in Consumerism and Spending
. 2 Comments

We decided a while ago that we needed a new car. Or rather, I decided that I wanted one, because my wife needs the car all the time for work and although I bike to work sometimes, I definitely won’t be biking all winter long (yes I know, Vancouver isn’t THAT cold) and I’d like to be able to go get groceries or drive to visit my parents or do any variety of things even if my wife is out using her car. I’ve been taking the bus for about 4 years now and although I enjoy it because of the amount of reading it allows me to do, I want to get home a bit quicker sometimes without cutting into my work day.

For the past few weeks we have been looking at the 2009 Matrix as well as a few similar cars such as the 2008 Yaris Hatchback and Mazda 3. All of these cost around $20,000 including everything. It was such a big purchase that we couldn’t decide on what to get but I think we were leaning towards the Matrix. I decided to check out the Buy & Sell one day and I scanned for old Tercels, Echos, and Corollas. I eventually found a 1997 Tercel Sedan for $2700. It’s better on gas than my wife’s little car from 1997 and also better than the 2009 Matrix. I checked it out after a test drive I gave the guy $100 as a deposit and shook on it. The only downside is that it has 230,000 km on it but I really don’t see that as a problem. It has had a single owner, no accidents, and he has maintained it well. This car will last at least another 10 years. I’ve never bought a new car before (my previous vehicle’s were at 1985 Tercel and a 1986 Tercel) but I really wanted to this time. I’m so glad we didn’t $20,000 on a new car when there are so many perfectly good old cars out there.

Popularity: 33% [?]

Ask Dave: How Do Bond Indexes Work?

Published
by
Dave
4 months, 2 weeks ago
in Ask Dave and Bonds/Fixed Income
. 1 Comment

A reader named Charles asks a very good question about how bond indexes work?

Quick question for you. I, of course, know how TIPS and bond works but what about a short-term bond indexes (XSB or XRB or TD e-Series) for instance? Does an investor actually gets coupon payment? (I dont think so…). Because the market value of the bond doesn’t change much, so the investor basically gets its return from the quarterly dividends only?

I have a good understanding about how bonds work myself although I don’t know much about the details of how bond indexes work although I sort of just imagine it as a basket of bonds with different dates of maturity, different coupon rates, and different face values, and that buying an index fund is just as if I had bought all the underlying bonds at their current face value. I will also receive all of the interest payments on the bonds in the index, or some of it will be reinvested into purchasing other bonds. That’s just my idea or assumption of how it must work.

Here is a short summary of how bonds work and how bond funds (mutual funds in this case, but an index should be no different in theory) from some website, but it is reprinted from American Century Investment Services, Inc.:

It’s easier to understand how bond funds work after you know how individual bonds work.

An individual bond pays interest at a rate set by the issuer. Usually, the issuer agrees to pay interest on a regular basis such as quarterly or semiannually. The current yield on a bond, which is the amount you earn, is calculated by dividing the amount of annual income by the bond’s price.

For example, if a $1,000 bond provides $80 in income, its current yield is 8% (80 divided by 1,000). Bonds pay interest income regularly and repay the face amount (principal) when the bond matures. Keep in mind that the price of a bond can change after it’s issued, which could change the current yield even though the interest rate stays the same.

With bond funds, the current yield also is referred to as the distribution yield, and it is calculated using the daily dividend per share. This is what is used to distribute income to the funds’ investors.

Another website called Quamut had a pretty good explanation of How Bond ETFs work:

Bond ETFs track indexes that contain individual bonds. Bond ETFs don’t have a face value or a coupon rate, however. Instead, bond ETFs have a share price that’s determined by the prices (face values) of the individual bonds in the index that the ETF tracks—when the prices of those bonds rise, the ETFs share price also rises. In place of a coupon rate, bond ETFs have a yield (interest payment) that equals the average interest rate of the bonds in the index that the ETF tracks. Though the interest payment on an individual bond is fixed, the yield of a bond ETF can change as the individual bonds in the index tracked by the ETF shift. Generally, these interest rates change only in small degrees.

If anyone else can find a better explanation out there please pass it on. So far the Wikipedia article on Bond Market Indexes is not great.

Popularity: 40% [?]

CommunityLend Pre-Launch Site Revealed

Published
by
Dave
4 months, 4 weeks ago
in Debt/Credit Cards and Investing
. 2 Comments

CommunityLend is now closer to launch, with the unveiling of their new pre-launch website. CommunityLend is the Canadian version of Zopa (from the UK, but has now expaneded to other countries) and Prosper (from the US), which are P2P lending sites. In theory, by reducing the middle-man (the bank), lenders and borrowers alike should get better rates then they would through the bank.

Popularity: 40% [?]

Sigh…Another Report Shows That Mutual Funds Don’t Beat Indexes

Published
by
Dave
5 months, 3 weeks ago
in ETFs, Indexes and Mutual Funds
. 1 Comment

John Chevreau looks at the latest “the SPIVA (Standard & Poor’s Indices Versus Active Funds) scorecard for 2007″ and it doesn’t look good. When will the average Canadian realize that investing in mutual funds is a loser’s game? Check out Andrew Teasdale’s interesting comments below the article. Here’s a snippet:

Mutual funds in general are products whose main objective is to earn returns for financial intermediaries and financial institutions and in many respects pander to the short term whims of the general investing public and the financial community at large. Sadly the mutual fund industry (as a whole) could be considered more of a game with the odds stacked against the investor than a serious attempt to deliver value and discipline. . . Canada however is one of the worst offenders when it comes to the value for money mutual funds offer the investor. When will Canadian investors as a whole start to realize that the odds, based on the current status quo, are more often than not stacked against them?

Popularity: 50% [?]

Garth Turner’s New Book and Blog

Published
by
Dave
5 months, 3 weeks ago
in Economics and Real Estate/Housing
. 2 Comments

Liberal (formerly Conservative) MP Garth Turner has a new book out called “Greater Fool” as reported by Vancouver Condo Info (see “US housing market problems to show up in Canada?). It’s all about the coming crash in housing prices in Canada. He’s also started a blog at http://www.greaterfool.ca. Enjoy.

Popularity: 44% [?]

Ask Dave: What’s the Best ETF Allocation 15 Years Away from Retirement?

Published
by
Dave
6 months ago
in Ask Dave, Asset Allocation and ETFs
. 2 Comments

Our question today comes from Charles who asked me what he should do with his dad’s pension assets, which are currently invested in two mutual funds:

Hey Dave!

My name is Charles, and I am a Finance student at the John Molson School of Business in Montreal. Lately, I decided to take over my dad’s pension fund. His company provides my dad with $15,000/year to be invested with Desjardins Financial Security (I don’t think you have this Quebec bank in BC but it is popular here and in Ontario). His plan is a defined contribution plan and not a benefit plan. When I look at my dad’s assets, he had 2 funds: 1) Jarislowsky Fraser Balanced Fund 2) Jarislowsky Fraser Canadian Equity Fund — These funds are not beating the market (benchmark) often and if they do…well these funds MER are expensive so they perform worse than the market.

Therefore, I wanted to take over his asset allocations but I have no choice but to deal with Desjardins since his company deals with them but of course I or my dad can choose its asset allocations.

I am a strong believer of index funds and ETFs. Desjardins offers great Barclay’s (iShares) ETFs: 1) Active Canadian Equity fund, 2) EAFE Equity Index, 3) Universe Bond Index Fund, and 4) S&P/TSX Composite Index Fund.

My dad is currently 48yrs old and wants to take its retirement when he his 63 - 65 years old. Therefore, a good 15 years of investment.

Here’s my question…what should be my weights in each asset class?

I was thinking 70% equity; 25% bonds and 5% T-Bills. Is having all of the 25% bonds in the Universe Bond Index Fund good? As for the equities, is 60% in S&P/TSX Composite Index Fund and active Canadian Equity fund and 40% for EAFE Equity Index any good? If I have the S&P/TSX index..is Active Canadian Equity relevant?

You can find all the info for each fund on Desjardins‘ website:

Again, thanks for your help and thanks for your great website!

First of all, it’s too bad that Desjardins does not publish the MER of those funds, although it is pretty much a given that they are going to be higher than any Barclays (iShares) ETF.

Although Charles says that “these funds MER are expensive so they perform worse than the market” it seems that over the last 10 years the Jarislowsky Fraser Canadian Equity Fund has outperformed the S&P Composite Index (16.3% to 9.5%). Although that probably says more about your dad’s reasons for choosing this fund over the others and this fund’s longevity, than it does about the fund’s prospects of “beating the index.”

Currently Charles’ dad is invested in 77.5% equities (50% from JF Canadian Equity Fund and 27.5% from JF Canadian Balanced Fund) assuming that he is invested equally in both of these two funds. My first recommendation would be not to deviate too much from what his dad was invested in before. This isn’t Charles’ portfolio, and if things turn ugly (or uglier?) for either stocks or bonds he doesn’t want to be the one to blame for shifting him more or less into either category. So I don’t see anything wrong with going with 70% equities in his new ETF based portfolio. I really don’t have a precise answer on what allocation of bonds/equities is right for your dad. I would try to stick with a balanced approach, and by that I mean that he should be invested 25-75% in equities and 25-75% in bonds (neither all bonds or all stocks). Risk assessments on banks’ websites (like TD Canada Trust’s Retirement Strategy Tool) are somewhat useful, not to come up with a precise answer, but to give you something that is in the ballpark. If anything, psychologically they can give Charles and his dad some comfort.

The Bond Universe fund is a good way to capture the bond market.

I don’t see anything wrong with his allocations within the equity class. I would not bother with the Active Canadian Equity as he will just get poorer performance (on average) than the index itself (after MERs). The only other thing that I noticed is that there is no exposure to the US market here as it looks like Desjardins does not offer Barclays’ (iShares) S&P 500 Index. I assume his dad has other investments besides this pension? If so, then I hope Charles will look at his entire portfolio (pension + RRSP + spouse?) as one, rather than each individually and hold a US index outside of his pension.

Popularity: 55% [?]

RRSPs versus TFSAs

Published
by
Dave
6 months, 1 week ago
in RRSP
. 0 Comments

Here is a great little summary of how the RRSP and the TFSA differ: “RRSPs versus TFSAs: The Math”

In summary:

So, while it appears that the two plans produce the same results, that only holds true if your upfront tax rate is the same as your tax rate later on.

RRSPs will make more sense when the tax rate upon withdrawal is expected to be lower than the tax rate upon original contribution. Conversely, TFSAs will work out better if your tax rate (including the effect of RRSP withdrawals on benefits such as the Guaranteed Income Supplement or the Old Age Security, which are clawed back based on income) will be higher upon withdrawal than it was when you contributed.

Popularity: 42% [?]

Site Moved to New Server

Published
by
Dave
6 months, 2 weeks ago
in Miscellaneous
. 0 Comments

Well I got the site moved over to a new server and sorted out the kinks. If anyone notices anything weird let me know.

Popularity: 40% [?]

www.financialwebring.com