Financial New Year resolutions (making it simple to help make it work)

In the wake of over eating and over spending during the Holidays Season's.  It makes sense to visit the top new year resolutions, these usually involve fitness and of course finances.  Let's face it, we all make new year resolutions but to maintain them over 12 months is always the challenge.  To help you along, I've make financial new year resolutions as simple as possible, after all a simple idea is easy to think about and maintain in everyone's busy life.

1. I resolve to figure out my finances.

To make it simple, lets not discuss over spending or trying to figure out how much my bank is charging me in fees.  My suggestion here, tracking.  Why not make it easy, do what you are comfortable with.  There are many apps (Mint is a popular app) for smart phones that will help you track your expenses and income with ease.  Not everyone is comfortable with these apps, everyone has a reason.  I say start with a simple excel spreadsheet and separate by month and category.  I am not going to shove categories at you, you do what you feel are your categories, after all its you that will need to figure out your finances for the year. Bottom line, figure out your income and expenses using methods you are comfortable with.

2. I need a budget, I think I am spending too much but am not sure.

Once you get down to figuring out your finances, you will need to establish a budget, once you categorize your fixed expenses like car insurance, utilities, cell phone bill, etc you will see how much you have in variable expenses.  Most people who see in writing how much they spend each month just to maintain a basic standard of living are shocked.  Mortgage and car insurances are usually the biggest numbers in the fixed expenses area.  Bottom line, the 1st few months you can live normally before you can establish a budget.  All this time, track everything.

3. I resolve to get out of debt.

Now this resolution will require a bit of work.  Now before we get into debt, I would like to categorize debt into good debt and bad debt.  Good debt is something like rent/mortgage payments, we all need to live under a roof.  This is good debt.  Bad debt is a bit more obvious but needs to be put into writing.  Bad debt includes things like luxury vacations, renovations to the house, leasing a car.  Now before you lynch mob me, yes those are bad debts, most times these type of items go onto a credit car or line of credit which are not paid off completely to zero each month.  This could go into the budget section, think about it, do I need that luxury vacation 2 times a year?  Maybe cut it down to once a year and make it not a luxury getaway, make it a simpler vacation.  Do I need my basement renovated at the beginning of the summer and then do a deck in the backyard in August?  Budget those renovations.  Leasing a car, everyone thinks its good, a new car every 2 years.  No ownership.  This matches well to the Buy a house or rent an apartment idea, where renting is waste of money.  Do some thinking here, do you want to lease a car for 20 years?  Back to the heading, simple ideas to think about to get the mind thinking about things.  After all no one will be helping you with your finances but you alone, so get those ideas into your head and act on them.

4. I resolve to save more.

If you are reading this article, I hope that you have opened an RRSP or a TFSA account already.  If not, make it a point to open one this year.  Once when I was 27 years old and 2 years into my RRSP contributions, I had a friend who was 25 ask me why am I so crazy about RRSPs.  Her comment was "are you looking to retire soon?"  She thought RRSP were totally for retirement.  A bit of this is true, money should be withdrawn from an RRSP when annual income is next to zero which means in retirement or (knock on wood) in case of disability where you can not work and your annual income is close to zero.  How much should I save you ask?  There is no concrete answer to this question, it depends on the person.  Generally, it should be 5 to 10% of your after tax annual income.  You might want to either open up automatic withdrawals intros your RRSP.  Fees are another item that can be tracked and once again looked at carefully.  Am I sick and tired of the bank charging me $11.95 a month for my checking account?  Do you homework, there can be options.  Saving can also involve the dreaded Mutual fund MER Fee.  In my opinion, i found out of the MER fees while doing a new year resolution and it put ideas into my head for weeks until I found out all about them.  If you need to save money, read my previous posts on Mutual Fund MER fees.   It will open your eyes.

5. I resolve to stop wasting money.

This should really be an every day thing but as a new year resolution.  A big waste would have to be cell phone, television, and internet bills.  Cell phone plans in Canada are controlled by the big 3 providers in Canada, everyone has Rogers/Bell/Te;us.  How can I save there?  Well there are other options, a very good choice could be Wind Mobile.  They have unlimited data plans and are placed as a solid 4th place provider.  As of this article, yours truly has just switched to wind mobile from Telus.  I will post my experiences in a future post once I have more experience with their plan.  What happened to me is that I got sick and tired of Telus and did homework, there are options out there.  Once again planting ideas for future action.  Effective March 1, 2016, cable providers will need to offer customers an a al carte choice for television channels.  This is in response to customers complaining about bundles with channels they never use but have to pay for.  (there will be a future post on this topic also).  Internet bills, yes everyone has their stories with over priced internet.  Again, there are choices out there, you just need to plant the idea and think.  Now there are a lot of adds out there for COMWAVE for unlimited internet.  It features former Leaf Tie Domi saying stand up to the big guys.  Their internet is probably just as good as the big guys, they might be lacking in certain options or features like longer wait times for a service guy to come out or no coverage in certain communities but again plant that idea.


There you have it, a top 5 new year resolutions and how you can actually make it work.  I tried not to give examples in every section but some I had to, just to get you started off with and idea and making it work for the year.

How about you, do you have any resolutions that may fit into this article?

Shaw Communications purchases Wind Mobile for $1.6 Billion - makes Wind 4th larges wireless player in Canada and catching up

http://www.thestar.com/business/2015/12/17/shaw-to-keep-wind-mobile-a-discount-mobile-carrier.html

Toronto Star article summarizes Shaw's purchase of of Wind Mobile.  Shaw will continue to offer Wind as a discount model to the big three providers, Bell, Telus, and Rogers.  Now there is a reason that Wind is a discount to the big three, Wind has primary coverage for the big cities in Canada.  If you look at their coverage map, that is basically what it is, you go far away from the big cities, and you run into dropped calls or roaming onto someone else's network.  Now you think, why is that great, who would want that?  Well Wind offsets that with unlimited talk and data within the city boundaries.  This has been well received by consumers, making this 6 year provider the 4th largest provider of cell phones in Canada.  Now everyone think of their plan and now consider Wind can give you unlimited data for $40 a month, talk and text is included.

Last week, Wind also secured $425 Million from a  group of banks to upgrade their 3G network to a higher LTE network.  This new LTE network is planned to roll out across the Wind Network by the end of 2017.

Before Shaw, there was no serious inroads or competition scare for the big 3, why would there be any? The big three control the Canadian landscape.  But to see how serious this Shaw/Wind deal is, the next day on the stock market, Bell, Rogers and Telus sharply dropped.  With Telus dropping the most in 1 day in 2 years.  It looks like the big 3 heard the announcement, well at least the investors.

Wind is the 4th largest provider but only controls 3% of the market.  At the end of the 3rd quarter, Wind had 940,000 customers, compared to market leader Rogers with 9.8 million and 8.4 million for Telus.

Shaw plans to bundle their internet and cable services with existing cell customers and increase their footprint beyond B.C. and Alberta where the majority of their customers are.

All positive happenings for both Shaw and Wind, expect to hear more from both in the upcoming year. With that I leave you with the following stat.

Average revenue per wireless user

Bell Canada $65.37

Telus $64.22

Rogers $61.02

Wind Mobile $38

Industry average $61

Sources : company reports, Bank of America, Merril Lynch, Toronto Star

Are you house rich or house poor?

According to Statistics Canada, about one-quarter of Canadians are spending too much on housing costs.  "Too much" is defined by Canada Mortgage and Housing Corporation (CMHC) as 30% or more of household income.  So saying that,  Are you House rich or House poor?

The CMHC refers to household income as being pre-tax.  Now the take home for most households will be different due to the tax system and it's many variables.  There can be a big difference in after-tax income between 2 households with identical incomes.  

According to CMHC, housing costs refer to costs such as rent, utilities for renters.  For homeowners, it includes mortgage payments, property taxes, condo fees and utilities.

The 30% rule does ignore other substantial factors.  What if the household has 2 cars and the other household has no cars.  What if one household has kids, the other household none.  Cars and kids are not cheap.  There will be differences for sure as no 2 households have the same variables.

With young couples, they are often wondering if they can afford their dream house, without breaking the bank.  Taking on a bigger house and a bigger mortgage can limit other things which may or may not be important.  Retirement savings might need to be scaled back.  The annual family vacation might need to be scaled back.

The baby boomers, are considering downsizing their home.  In some cases, it's because the person has more house then needed once the kids grow up and move out.  Also if they sell and move outside an expensive city like Toronto or Vancouver, the money from the sale can pad retirement.

House poor can also be determined by how much savings is readily available?  Do you have 6 months of emergency money in case of loss of income for whatever reason, loss of job, injury, sickness?  This 6 months of savings should be outside of any registered accounts but if the worse happens, then registered accounts can be used.  Mind you, tax considerations should be kept in mind.

I have known more than my share of people within my circle that have ignored RRSP contributions entirely for their entire working career.  Their objection is that they have to pay the tax back eventually and they do not want to be stuck with that burden in their golden years.  This starts a deep conversation at social events.  They pour all monies into their house, which is fine but remember that when they stop working, and it will happen, the house will be paid off but savings will be almost non-existence.  That would be a definition of house poor.  Beautiful house, no money to buy anything else.  The flip side of having to pay the tax back later in life can be argued also but they fail to realize that they can somewhat control the tax paid back later in life, either as straight RRSP withdraws (with no other income of course) or through a RRIP, the tax will be a bit lower than the 40% rate paid during your peak working years.  you can withdraw as much or as little and pay the tax rate associated with your withdraw amount.  Hopefully your mortgage will be close to finished but then you will not be house poor.

One thing to remember that the 30% rule is just a guideline or rule of thumb.  No important decision should be made without doing your home homework on the topic.

To sum up the main points to determine if you are house poor:

Is your mortgage payments more than 30% of your after tax income?

How much is your after tax income?

Do you have 6 months of emergency money in case of loss of income for whatever reason?

Do not pour all your money into your house and ignore your RRSP.

Are you house poor or house rich?

TFSA dividends spent wisely - why not put them into an RRSP?

An idea occurred to me the other day.  The news kept talking about the TFSA limits next year and how it was going to revert back to $5,500.  As Justin Trudeau's government finalizes all the new taxes and everything else that comes with running a government.  Now opinions will vary of course but there seems to be a growing community of knowledge investors out there supporting the idea that the TFSA is more valuable than the RRSP.  This is of course a topic I can comment on but not today.  While thinking of the TFSA, I thought about the dividends.  The general consensus seems to be that you keep your money inside a TFSA and any capital gains and dividends are tax free.  Correct.  But if the dividends are tax free, what do you do with them?  DRIP them?  you could do that but I am already doing that in my entire RRSP portfolio.

So what to do with these tax free dividends.  Can we withdraw them and use them to buy things, why of course you can, again the general consenus is to use this money for emergencies or a giant screen tv.  Sounds great, but why not use these dividends to pay for some of your RRSP contributions?  Yes you know how some people contribute monthly into their self directed account or they lump sum the amount at the beginning or end of the year.  Well can these tax free dividends be used to reduce that amount?

We start off by assuming that you have the Savings Account TFSA that really pays a savings account rate of like 0.5% or something like that (this rate is what BMO is currently offering).  This is very low.  So if for example, you have $20,000 (this is an average amount given you started in year 1 of the TFSA and you did not max out)  in your savings account TFSA.  That will preserve your initial investment of $20,000 yes, but you will earn $100 a year on this $20,000.  This is really not enough to spend on an emergency or flat screen TV.  you get this amount dividend by 12 months if lucky so you get $8 a month if you are lucky enough they pay monthly.  Everyone talks about the cost of living or inflation some call it.  The most recent cost of living for 2014 is 2.5%.  You are going backwards with your $20,000.  Your $100 is eroded by the cost of living and guess what else, the bank makes money on your $20,000 so they love you.

So Peter, what are you talking about spending the TFSA dividends wisely?

Here comes my example.  First off, you have to sign up for the self directed TFSA that I have discussed in previous posts.  Again read the description of what you can put in a TFSA, mutual funds, stocks, GICs, bonds, etc.  So why does the bank keep promoting a freaking savings account?  They know that that product makes the most money for them.  Once you sign up for the self directed TFSA account, you transfer the $20,000 from the savings account TFSA to your self directed TFSA similar to the RRSP example I did in my BIG BANG post.  Now you control everything, what you buy, how much, etc.  My example we will use BCE.  This stock is considered by many to be blue chip stock and is as low volatile as you can get yet they have a very good yield.  Currently BCE is yielding 4.5% at at stock price of $57.00  What does this mean?  For those who like math, here we go.

Buy 350 shares of BCE at $57.00 for a total of $19,950.  There will be the commission fee of $9.99 for most accounts so you have $19,959.99 taken out of cash and used to buy BCE.  That's all you pay for to buy.  You only need to pay that $9.99 again if you sell.  But that will be far into the future.  No ongoing MERs, nothing.  Now it's just the stock price going up and down and more importantly, the dividends.  Like I said, this is a good stock but it will go down or up, but historically it's all up as BCE is a very large company, Bell cell phones, Bell television, Bell internet, sports, etc.

So now BCE will pay you $0.65 for each share 4 times a year if you do not activate the DRIP.  Let's see, that's $227.50 each quarter or $910.00 a year.  This amount is as close to guaranteed as you could get as there are thousands of investors across Canada getting the same dividend, $0.65 a share.  Wait a minute Peter, you are telling me instead $100 a year, I can get $910 a year with the same $20,000.  Yes you can, and also if you listen to the news, and do your homework, you will notice that BCE raises it's dividend once a year for almost 30 years straight now.  So what happens if they raise their dividend to $0.67 year which is a modest 3% and very reasonable for BCE to do, instead of $910 you get $938.

Now do not DRIP this amount, instead withdraw it from you self directed TFSA and put right away into your self directed RRSP.  Now you have tax free dividends helping you pay for your annual RRSP contribution.  If you decide to contribute say $8,000 for 2016.  now you only need to contribute out of pocket, about $7,000 as you will get $900 from your TFSA.  You get your RRSP receipt at the end of 2016 for $8,00, file your income tax return.  Get refund. Done.

Now I still love deferring my taxes through the RRSP.  They say if you know that your highest tax rate is now and you know you will be in a lower tax rate later than the RRSP is the way to go

Comments and remarks on the above example are always welcomed.

Thanks for reading.

Peter

Basics of Dividend Investing part 2 - How I do it - Big 6 banks excel spreadsheet

Remember at the beginning I mentioned that to get into Do-It-Yourself investing, there would be a little work to do.  Well you've opened the self directed account, you've transferred money out of mutual funds to your new account.  Now you have all this money to re-invest.  What stocks do I pick.  Well it is really all up to you and I've provided some of my guidelines to help you select what you would like to invest in.  First off, recall that there 3 styles of investing, Growth, Index and Dividend.

Growth Investing involves buying stocks low and selling high.  Pretty easy concept, but this involves more work than I can handle, on my end at least.  The part that makes it hard work, is that once you do the research, you buy low, then you sell high.  You've made a profit but now you need to do more research and wait it out for the correct price to buy low again and then sell high.  This style might appeal to others and they can excel at it.  Not for me.

Index Investing involves buying index Mutual Funds or index ETFs.  Matching the market performance less a small fee.  This should beat 50% of regular investors who pick their own stocks.  This style might appeal to others and is also easy to follow as every time you hear on the radio on the drive home regarding the TSX's performance that day, you will know exactly what your performance was for that day.  This works somewhat for the investor who is in it for the long term.  This style would be my style if not for the next method.

Dividend Investing means to pick dividend stocks that will pay you a dividend to hold them.  I have also included a DRIP to this method.  DRIP means dividend re-investment program.  Imagine, receiving shares every time a dividend was paid, then the next dividend payment would be calculated not on your initial amount of shares but the additional shares you got through DRIP are not part of that calculation.  This truly is a method to be in "long term".

Here is my simple chart with the big 6 banks as an example.

Ticker	Price	Dividend	Freq	Yield	100	1 DRIP	Dividend	Investment
					Shares		Payout
BMO.TO	76.58	0.82	Q	4.28%	82	95	77.9	7275.1
BNS.TO	60.63	0.7	Q	4.62%	70	95	66.5	5759.85
RY.TO	76.07	0.79	Q	4.15%	79	100	79	7607
CM.TO	99.99	1.12	Q	4.48%	112	95	106.4	9499.05
TD.TO	54.58	0.51	Q	3.74%	51	115	58.65	6276.7
NA.TO	43.23	0.52	Q	4.81%	52	95	49.4	4106.85

I picked the 6 banks because they are the most easily recognized brand in the Canadian stock market.  There will be a local branch in every city in the country.  You are probably thinking, this is cool, I can invest in my local branch, somewhat true but overall 1 branch is but a small fraction of the giant monster a bank is.  But alas, your small presence at the bank is what they like, they love that $100 monthly contribution into mutual funds.  They rely on that totally, imagine doing that with 100,000 customers all over Canada?  That $100 doesn't look that small anymore does it.  You can then take satisfaction that you are investing in where your money is.  A planned blog later will show how to research and find other stocks that interest you.  You will say to yourself, "I didn't know I could own a part of that company, I like their product, how is their stock?  I would love to be a part of that. "

Onto my simple chart explained (I have a more complex chart planned for later).

Ticker
This is the symbol or ticker that represents the company, you will need this ticker to purchase shares and also to track the price.  I am sure that once you buy a stock, you will want to track it. Example BMO.TO is Bank of Montreal.

Price
This is the current price at any given time.  BMO is $76.58

Dividend
This indicates the amount of the dividend currently being paid.  BMO will pay 0.82 per share

Frequency
This will indicate how often the dividend is paid out.  Quarterly and Monthly are options.  BMO is quarterly.

Yield
This one is a little important.  It tells you how much of a percentage of the stock price is being paid out as a dividend.  Higher yield means more money to investors in the dividend and if lower, well less money.  The formula is dividend payment times number of times a year divided by the stock price.  BMO's yield would be calculated as 0.82 x 4 = 3.28 divided by 76.58 for a yield of 4.28%

100 Shares
Back in the olden days, 100 share lots were the most common number of shares to buy.  I put this here to show what 100 shares will pay as a dividend. For BMO, they would pay $82 for a 100 shares.  This will tie in nicely with the next column.

1 DRIP
I see that 100 shares will pay me $82 in dividends for BMO.  The price is $76.58 meaning I don't need 100 shares to get 1 Dripped Share.  The formulas are all copy and paste in excel but this column is where you can customize it to see the absolute minimum amount of shares you need to get 1 Dripped Share.  I put in 95 shares and the formulas do all the work.  95 shares will give me a dividend of $77.90 which is above the $76.58 meaning usually a few extra shares just in case the stock price goes up, you want that 1 dripped share.

Investment
95 BMO shares will cost me $7,275.10 as per my formula in excel.

All the above information is available online.  Where do I find this Peter?  My favourite site for this information has got to be yahoo finance.  You put in the ticker, click historical prices, filter and there she goes.

https://ca.finance.yahoo.com/q/hp?s=BMO.TO&a=00&b=12&c=1995&d=10&e=24&f=2015&g=v

Here is what the screen will look like.  You can see the increasing dividend payments.  That is another criteria I look for.  They have to increase their dividend.  More on that later.

So this simple chart is what I use to track stock prices and their dividends.  I compared the banks, you can also compare telecommunications (BCE, Telus, Rogers), Insurance (Manulife, Sunlife, Great West), Utilities (Enbridge, Fortis, Hydro One), Energy and Gold stocks.  You can do anything but remember you need to compare companies in the same industry to see if a stock is cheap enough to buy.

Once I buy a stock, I usually never sell, I like the dividends.  And yes the stock price will go up, will go down, I can never predict that and I can confidently say no one else can either.  But I know my dividends for the year and when they are paid.  In my ideal world, the stock price would never move and I continue to receive the dividends.  A yield can be compared to an interest rate.  So why on earth would someone go out and buy a GIC for $7,275 and get 1.2% interest.  I can go out today and buy Bank of Montreal and get a yield of 4.2%.  Yes I know the stock price and change and you will lose money on paper but the 4.2% will not change.  Like Warren Buffet says, if you buy a building and rent it out, the rent does not change but the building's value will change.  If the building's value drops, I'm not going to sell it because it went down, i'm still going to collect my rent. So that is why investing in high quality stocks with increasing dividends is a must.

As promised, it will take a little work to setup your account and also some work in organizing yourself in picking stocks.  This is one of my ways to setup a simple excel spreadsheet to watch stocks I am interested in.

Hopefully you have taken away from this blog entry confidence and new knowledge, making it easier for you to take that first big step into "being in it for the long term"

Any comments, questions, rebuttals, please post as comments to my blog.

Thanks for reading.

Peter

Basics of Dividend Investing (Who, What, Where, When, Why, How)

Now we get into the main objective of this blog.  Getting the ordinary person comfortable with DIY (Do It Yourself) investing.  My preferred style of investing would be Dividend investing.  Now I am not saying this is the correct method of investing, this is my own opinion.  It fits my ideas of how my money should be invested and also strongly answers the question "I am in it for the long term".  A lot of people say that, it is easy to say, it means that they will tolerate downward swings and upward swings with the hope that in the long term, it all evens out with an upward gain.  This is somewhat true as historically, all equities are factored in with an averaged annual gain of about 8%.  That sounds fantastic, annual return of 8%.  This is of course is averaged out over a lot of years.  It's tough when your annual return is negative 5% or lower.  How about when it says at 2% gain for the year?  Where is that great 8% then?  This type of thinking long term works but no one thinks that long term involves the dreaded MER?  Remember my previous example of the average Mutual Fund MER of 2.1%?  Over 10 years?  Over 20 years?  If you have no idea what I am talking about, rewind to my earlier posts regarding Mutual Fund MERs.  It will change your thinking about being invested in Mutual Funds long term?

So the ordinary everyday person asks "So Peter what else can I do? Mutual Funds are the only thing the banks offer?"

We will answer the above question with the 5 W's and 1 H (Who, What, Where, When, Why and How).  We need to sort through the dividend payment process and explain the concept of dividends.  Chances are its not the concept of dividends that confuse you, its the terminology and exactly how it works.

WHO

Who is involved?

The decision to distribute or pay a dividend is made by a company's board of directors.  There is nothing requiring a company to pay a dividend, even if the company has paid a dividend in the past.  However many investors view a steady dividend history as an important indicator of a good investment, so most companies are reluctant to reduce or stop their dividend payments.

Dividends can be paid in various different forms, but there are 2 major categories, cash and stock.  The most popular type is cash.  The money is paid to stockholders, normally out of the corporation's current earnings or profits.

WHAT

What do you need?

First off, you need a brokerage account or self-directed account.  This will require a little work.  If you have all your RRSP money in mutual funds at the bank which was my situation (see previous blog entries) then there is a bit of work to do to get to the brokerage account setup.  Most accounts allow you to buy GICs, Bonds, ETFs, Stocks and alas mutual funds.  Yes that is correct, you can buy and hold mutual funds in a brokerage account.  So why on earth wouldn't you just buy and hold the mutual funds at the bank instead of going through all this trouble?  Well if you are interested in mutual funds, you can with a brokerage account, buy any mutual fund in North American and not be limited to only the funds your local bank can offer.  The bank mutual fund also lets you contribute in small increments (remember that $100 a month) without fees except that MER.  With a self directed account, you will need to pay a fee to buy whatever amount of mutual fund you need.  You will then need to pay again (if you are doing it monthly) to buy that same fund.  So pros and cons in bank mutual funds and self directed mutual funds.

The brokerage account can be several different types.  RRSP, RESP, TFSA, or non-registered.

Yes RRSP, a simple realization that you can self direct your RRSP and save on fees.  You can transfer your bank RRSP account to your self directed RRSP, there usually is a $50 fee or something along that line.  Once the money is transferred, you can sell (which is what I did) your mutual funds but don't confuse the word sell with withdraw, when you sell the mutual fund (hopefully on an up market day), the money is now RRSP cash.  Yes it stays inside your RRSP as cash.  Now you can buy GICs, Bonds, ETFs, stocks and hopefully not back to mutual funds.

Registered Education Savings Plan (RESP) can also be a self directed account also.  You control everything including what you buy.  Imagine 18 years of mutual fund MERs compounded?  Yes the government helps by giving you the option of any capital gains taxed in the child's name and yes they will match up to 20% each year with a maximum lifetime contribution limit amount of $50,000.  Imagine buying a stock for the standard fee which is $10 or less and having dividends paid to your RESP for 18 years compounded vs 18 years of mutual fund MERs.  Now that is "in it for the long term".  What bothers me not so much the banks because they have posters only at the local branch promoting RESP but those strange mall kiosks of some mutual fund company asking if you care about your child's future?  Shaming you into thinking you don't.  They want you, in the middle of the mall hallway, to contribute to your child's mutual fund RESP for a tasty 2.1% MER each year for 18 years.  You will never see them again.  You will never talk to them again.  Why would you trust them with your child's education fund?

Tax Free Savings Account.  Banks have posters offering to give you a special promotional offer of 1.2% interest to open a TFSA account (at the bank level).  They then open a savings account with 1.2% for 6 months, tax free.  They hope you put more money into the savings account, staying under the annual limit of course.  They give you 1.2% and then as always, they make more money on your money while its in the TFSA.  Why on earth people fall for this is beyond me.  If you look up the definition of TFSA, even using the brochure at the bank, it says you can put GICs, bonds, ETFs, stocks and mutual funds into it.  But the bank shoves the idea of a savings account into your face? Why? Its because of the name, tax free savings account.  The word account summons up images of an account, a bank account, savings or checking.  They won't promote a self directed TFSA as they make way less money there.  And as probably someone reading this, the everyday person will open a TFSA savings account.

Non-registered self directed.  Now here you are all on your own.  Buy, sell, hold.  No special gimmicks to encourage putting money in.  With a self directed account, you can spend your dividends or capital gains right away.  Of course since this is non registered, you will need to pay taxes on any gains, dividends included.  There is of course the dividend tax credit, which will be a future blog entry.

WHERE

Once opened and money transferred to your self directed account.  You can purchase stocks of companies in the North American stock markets.  The Canadian markets are the TSX and the Venture exchange.  The U.S. markets are the DOW Jones, SP 500, and Nasdaq.

WHEN

Trading hours are 9:30 am to 4:00 p.m.  Something interesting which I will blog later is, the trading of Crude stops at 2:00 pm.  Asian markets started at about 9:00 pm EST and European markets start 3:00 am EST.  Now you will need to trust me on this, I've stayed up to watch the opening bell in European markets on CNBC.  Very tired next day.

WHY

Why do all of this?  To some, it is very exciting.  To own a part of a company, to share in its profits.  To others, its to make money.  To others again, they may find it fun to own a part of a company of their favourite product like Starbucks, or Nike.  To me, it is back to the beginning of this blog.  In it for the long term.  Which means reduced fees I pay which means saving money.  If you buy a $10,000 of a stock, you pay $10 or less and then you are in it long term and receive dividends.  All you paid was the $10 transaction fee, no ongoing annual haircuts called MERS.

HOW

How do I do it?  Now again, this is my method, you can decide if you think this fits your ideas of saving and investing.  The HOW is a bit of a lengthly process so I will dedicate an entire blog on it.  With examples and charts, and graphs.

Next blog…..How I do it.

Which Investment Style are you?

So now I am sitting with this rather large amount of RRSP cash in my brokerage account.  What to do? What to do?  Google is always a great place to start.  Mmmmm let's try investment styles.  I stumble across an article in the globe and mail.  I do believe it featured John Henizl.  I can say that after reading his article on investment styles, he changed my thought process completely on how to invest.  His ideals gave me confidence to do something that I felt fit my style.  Back to investment styles.  The article featured 3 styles of investing that were pretty commonly used now.

Growth investing, Index investing, and Dividend investing.

Which one to pick?   So I started to read.  Growth investing.  Monitor stocks, determine value of stock using metrics like p/e ratio, EPS, income statements, debt, balance sheets, etc etc.  Buy when stock dips and also when it dips, it is below its value.  Buy low.  Sell High.  This is classic setup for what people think the stock market is.  Buy low, sell high.  But this classic situation does not tell you the amount of work you need to put into determining when its low enough to buy.  This style sounded alright I guess, that is if you have the passion to monitor stocks and wait, sometimes for years it says before buying.  Who has time for the research and the waiting? Not me. Not my style.

Index investing.  I knew what an index was, there were a few of them out there.  The Toronto Stock exchange is an index.  A few in the States, like the Nasdaq.  I was like ok, so what is involved here.  Reading on, it says to invest in ETFs but only the index ETFs.  I was like, Mmmmmm I remember I had an Canadian Index mutual fund.  Is that the same thing?  After thinking about it and reading more, the mutual fund Canadian index fund I had was the exact same as the ETF I was reading about.  They both copied the same stocks and their percentage or weighted in the index.  But the ETF had an amazingly lower MER than the mutual fund.  I am thinking, why on earth would you purchase a Canadian index Mutual fund when you can so easily buy a Canadian index ETF?  Ok, the investing style aims to buy indexes in all geographic areas that you are interested in.  The thought being that you will make on your Index investment, the exact percentage the index is making, less a small fee.  So basically you are average, less a small fee.  That doesn't sound that great or very sexy.  The index goes up 10% for the year.  your investment also goes up 10% less the MER.  Basically you have beaten half of the investors out there because the half that has beaten your index return, means there is a similar half of investors that did not beat the market.  Think about it, to make money, someone has to lose money.  You are average with the index investing but in this case average beats half of the professional investors out there.  A better style than growth investing but was kinda boring, in fact extremely boring style.

Dividend Investing.  Now here is where John Henizl steps in and explains his rational on how he picks stocks.  He will pick stocks that provide a good dividend yield, history of increasing dividend hikes, good dividend payout ratio, and 5 year growth.  This style interested me right away.  You mean the stock will pay me for holding the stock?  Yes, that is correct.  You get paid to for buying and holding the stock.  Now the price can go down but it can also go up.  The dividends that are decided by the company's board of directors will ensure shareholders profit from the company's financial wellness.  They also show this through annual dividend increases.  Wait a second, the dividend increases, sometimes annually?  Yes that is correct, it's almost like a salary increase every year.  Reading on, there is something called a DRIP.  Drip stands for Dividend Re-Investment plan.  Basically, you can instruct your broker or the company to reinvest the dividend they pay out to you back into the company and give you shares instead.  Now there are 2 kinds of DRIPs, a syndicate DRIP and a true DRIP.  These will be looked at in detail in a later blog, probably a blog titled Dividend Investing.  We will also talk about dividend yields, ex-dividend dates, payment dates, and dividend aristocrats.

There you have it, 3 different styles of investing.  All are great but for me, it was dividend investing.  It changed my views of investing in the stock markets.  It wasn't purely a gamble anymore especially when you see how dividends can be a true "in it for the long term" style that will for sure make you feel better on your financial wellness.

Next blog……all things dividend….

The Big Bang (switching out of Mutual Funds)

So finally getting time to update my journey of financial wellness.  Again, like I mentioned before hand, I am not going to show you how to make a million dollars.  But you will feel a lot better about how your money is invested.

Like I mentioned before hand.  I had the classic $300 a month deducted into 4 or 5 mutual fund and then topped off if I wanted to contribute to my maximum RRSP limit.  I was really only concerned with getting that RRSP receipt and then getting my income tax refund, sometimes a very sizeable amount.  This went well for about maybe 15 or 16 years.  Then as a late player to the TFSA game, I decided to walk into my local Bank of Nova Scotia and inquire about opening a TFSA account since I finally bowed to the pressures of this great new savings thing that the government has allowed us mortal Canadians.  Got an appointment with a very nice younger financial officer named Henri.  He was very easy to talk to and I felt very at ease with him.  Of course he pulls up my profile and then asks if I have any other RRSP or investments elsewhere.  I said no, this is my core savings.  We then talk about opening the TFSA, I say something along the lines that I hate fees, in particular mutual fund fees.  I did do a little homework and recall that you can put Stocks, Bonds, Mutual Funds, and GICs to name a few into a TFSA.  However he talks about the poster in the lobby that the bank will offer a 1.2% TFSA account to anyone just opening a TFSA up.  I pause and think, something is strange, why did I read that you can put those items into a TFSA and he just mentioned the promotional special for the TFSA.  I then ask him why can't I put stocks and bonds into the TFSA?  He says, that would take more work and maybe mutual funds would be a better choice, he then proceeds to pull out a folder with the 1 page mutual fund profiles of about 10 funds, saying these are his picks and that I am more than welcome to pick any of these funds, even after I said I hate mutual fund fees.  I then ask him, I don't want mutual funds or that promotional bank account, why can't I put stocks into it because that is what the description of a TFSA is according to what the CRA website says.  He then tells me that you can't do that here, you need to setup another account but it will not be completed today.  I said why not?  the poster promotes opening a TFSA.  He then says I need to apply to open an account with a broker, I then ask, which broker, aren't you the broker?  he says no, you need Scotia Itrade, I then realized at that point, all the banks had discount brokers associated with them.  Bank of Nova Scotia (Itrade). CIBC (wood gunny).  Bank of Montreal (Nisbitt Burns).  TD bank (Waterhouse).  Royal Bank (Direct banking).  The names are not advertised that heavily at the bank level but they are a division of the bank.  Think about it, we see all the big 5 banks at almost every corner plaza or mall or business area in the entire country but these discount broker divisions of the banks are there but not there.  you might see a pamphlet in the waiting area, but thats about it, they are huge parts of the bank but for the everyday normal banking person, no promotion.  Back to my opening of the TFSA.  I then ask him, can I open a TFSA at the bank also?  He says yes, but I can't put stocks in that one?  He says yes, only what the bank can sell can go into the TFSA, like GICs, mutual funds or savings accounts.  Savings accounts I ask, why would I want that?  He says thats because its safe and no one loses money on those.  I said yes thats true but then you want me to put $5,000 into the TFSA at 1% and not pay tax on $50 for the year?  He then says yes.  I then said, that is very low almost like a GIC.  Then I say, if I put $5,000 into stocks and it grows to $6,000 is that $1,000 tax free?  He says yes.  I think that is more like it.  Last question, why is it called a tax free savings account and every bank wants to make you open a savings account?  He then corrects me saying it really should be called a tax free savings vessel because you can put stocks in there but you would need to open a brokage account which takes more effort and time.  I then say, bring it on, I don't want 1% for the year or mutual funds where the MER is 2.1%.  He then starts the paperwork, almost all of it is in 4 copies, meaning after he has to tell me the risks and what I am signing (I guess cuz the securities association makes him tell everyone this when opening an account) , I initial the same page on 4 different copies.  I sign the last page in duplication 4 times.  This whole process takes about 30 minutes.  He then tells me that he will mail 1 copy to the downtown Itrade office which is the the main office, he keeps one, he files one, and I get a copy.  The Itrade account will be active in about 5 to 7 business days.  Fine I think.  Now I am hyped up that I bypassed where my other family members like cousins and other friends opened up a savings account as a TFSA, and kept pumping the max $5000 a year into it, thinking they are saving money?  I realized at that point, the bank is making way more than 1% on the $5,000 so why the hell would I chase $50 a year tax free and what am I getting after the promotion ends, less than 1%, jesus that is less than inflation.

I then ask Henri, what about my RRSP?  Can I open a discount RRSP account?  He says yes.  I think damm, I put all my money into these stupid mutual funds but I will have to start from scratch with the Discount RRSP account.  I say, can I transfer my bank RRSP money into my Broker RRSP account?  Is that like withdrawing and depositing again?  I was scared to withdraw because everything I read says you should not withdraw from your RRSP otherwise you will pay tax.  He said yes you can, its called transfer in "kind".  I ask, so I don't get zapped with tax implications?  He says no, as long as you don't withdraw the money.  I say yes! but what about stocks?  Can I sell my mutual funds holdings to cash and then use the cash to buy regular stocks and the only fee is the buy fee (which is $10 to buy and another $10 to sell).  He says yes.  I was like WHAT THE HELL?  I didn't like mutual fund fees for about 2 years at this point and didnt' know you could do that.  He said yes.  I then say, is the paperwork the same as the TFSA paperwork, he said yes again. He then tells me that he has an appointment in 5 minutes so I will need to see him tomorrow.

Needless to say, I booked the appointment with Henri, signed the 4 copies of the application,  waited for both the TFSA and RRSP to appear in my new Itrade account.  Started to follow the stock market, I was reading a lot at this point, just devouring all reading materials about stocks, fees, how to place orders, limit orders, market orders. I controlled everything.  If my holdings went up or down, it was my fault, not anyone else's.  I finally decided on a general "up" day in the markets to "cash" out my all mutual funds to cash.  Now this not withdrawing, its staying in the RRSP as cash.

Now I needed to buy stocks, but where the hell to start?  On my readings, I kept coming across something called ETFs.  Exchange traded funds.  They had a fee with them, similar to a mutual fund fee expressed as a percentage.  I also discovered blue chip stocks.  I discovered index investing.  I discovered Dividend investing.  I discovered leveraged ETFs.  I discovered how to read dividend yields.  I discovered how to decide what to do with your income tax refund, pay mortgage or reinvest?  I read articles on people with no RRSPs and pumping everything into their hourse, good? Bad?  you will be interested in that answer.  What was my style going to be?  What to buy?  Is it safe?

At this point, I totally realized from all family members, all friends, that no one ever talked about investments.  Doing it yourself.  It is simply not promoted by anyone.  Doing it yourself saves a lot of money, that can't be argued but the sheer apathy and avoidance of the topic in every day lives of everyday normal persons is beyond a coincidence.  Canadians need to wake up and realize they can do this, if I can do this, you can too.

No more mutual fund fees  but now I have work to do with my life savings.

Next blog.......How I navigated all the financial jargon and terms and decided on my style and picked my stocks and also picked something else........

Mutual fund MER follow up

Before I get into what I could call the big bang (switching over all your mutual funds to money and then to stocks).  Some co-workers read my initial blog and asked about the following Mutual Fund situations and asked for my comment.

Questions:

1. Peter, I have a matching RRSP amount at work and I do remember picking the allocation you mentioned when I started work.  Am I still paying the MER at my work mutual funds?  and can I get out of it?
2. Peter, I have mutual funds in my TFSA.  It is a tax free savings account.  They can't touch me in there.
3. Peter, I have mutual funds in my Child's RESP, am I paying the MER? and can I get out of it?
4. Peter, I have mutual funds not at the bank but with a mutual fund company, are their MERs better than the banks, after all I get a dedicated sales person whom I can call direct.
5. Peter, I never paid any of these MERs you talked about in your blog, I've been with RBC for 20 years and they only take out $11.95 a month and I have my life savings with them.  There is no $10,500 fee a year.  You better come bank with me and choose my mutual funds.
6. Peter, I have been banking and investing for 20 years with CIBC, what alternative do I have?

All very good questions which is why I got into doing this blog, to help people understand, to help people feel good about their investments.  There seems to be misconceptions out there regarding Mutual Funds, a lot of people still think they are great, after all the Banks will never mislead us, they have branches everywhere, they have clean, sharp employees.  All very helpful.  The banks are banks because they are in the business of making money, they do a good job of it too.  I won't hold that against them but what I do is stand up and shout , the general population needs to educate themselves.  It's amazing how when you think about it, a reasonable person will spend 15 minutes at the store deciding whether to buy the $1.49 toothpaste or the $1.79 toothpaste, yet they will not send 30 seconds on their life savings.  People's bargain hunting sense like when they want the best deal on that Tassimo on Boxing day for $49.99 idealogy is thrown out the window when you have to deal with your $500,000 portfolio.  "Let's just let Johnny Money take control of our money because he has the nicest business card".  Canadians need to wake up and realize that they do have choice.  I was suppose to answer the questions above but I got carried away,  I guess its ok, its a blog.

ONTO the answers:

1. A lot of people have work RRSP or work Pension plans where they match 2 or 3 or even 4%.  I can't even start to explain how this setup is so amazing.  Getting a 100% return on your contribution right away.  It may not break the bank to have this small percentage taken off your pay but a lot of people do not take advantage of this matching from their workplace.  The power of compounding is on your side when you do this.  Yes I know the banks do talk about compounding but it really does work and works better when you don't need to do anything, you are compounding while at work.  The bad news is for your work place RRSP or Pension, they only offer mutual funds.  The funds are usually a 3rd party provider and they usually stress they have lower fees than usual.  So there is no way around MERs here, the best course of action would be picking INDEX funds as these are usually the lowest MERs in most mutual fund groupings.

2. Mutual funds in the TFSA.  Yes, any capital gains, or dividends are tax free in a Tax Free Savings Account, that is correct, but not the fees, someone has to pay to manage the fund, the MER is still being paid in a TFSA.

3. Again, banks love you to open up something else besides an RRSP, here we have the RESP, registered education savings plan.  You put money in and the government gives 20% of your contribution into the plan.  If you set this up at the bank level, they most likely offered GICs and Mutual funds.  Someone has to pay the fund, the MER is still being paid here.  There is a way to not pay MERs in an RESP.  That will be covered later.

4.  It sounds like your RRSP is setup with a company that is not a bank.  Fidelity Investments, CI Financial, Investors group, etc.  Their fees are usually a percentage similar to MERs or a fixed rate.   How can you be sure they are doing what is best for you, can you measure their performance versus the fees they are paid.  Historically, these types of financial advisors charge a lot more than your typical Mutual Fund MER.  They are always a phone call away but that comes with a price.

5.  Amazingly, someone did say this to me.  The only amounts that were deducted were the $11.95 a month from their chequing account which they believed was the fee for banking services, which included their RRSP with mutual funds.  See there is no deduction or line in a statement that shows a dollar amount for fees.  This is very misleading to normal everyday people, they are used to something telling you what you pay.  Go get your car fixed, pay, get a receipt.  Go setup an RRSP with mutual funds, no receipt no deduction.  Has to be somewhere.  Oh they take my chequing account fee every month, that must be it.  Nothing could be further from the truth.  Please read my 1st post, it will explain how fees are collected.

6.  Alternatives?  well that is where I come in.  It took a certain event to trigger my journey into making my money work for me instead of my money working for someone else.

Next blog I will show you how to switch your mutual funds out of MERs and save that $10,500.....

Mutual funds Fees

Since this is my first blog post.  My first topic will be Mutual Funds, in particular the M.E.R. or management expense ratio.  For most Canadians, the core saving vehicle will be the Mutual Fund in a RRSP.  You setup pre authorized deductions of whatever amount you want.  $100, $200 a month.  Sound familiar.  You then have a setup meeting at the bank are also asked about your risk tolerance, your time horizon, if your portfolio loses 10%, will that make you mad?  Basically a questionnaire.  You are then asked to pick your allocation for your automatic withdraw every month.  30% to Canadian Equity, 30% to Fixed income, 20% to U.S. Equity, 10% to European equity, 10% to Energy stocks.  Sound familiar?  Then you have that $200 deducted every month and allocated accordingly.  You get a tax receipt at the end of the year.  You file your income tax return and get a refund back.  All is well, you get quarterly statements of your funds going up or down.  If this setup sounds familiar, read on.  This monthly deduction thing goes on for 5 years? 10 years? 15 years?  Its not uncommon for it go on longer, meanwhile you keep pumping in those monthly contributions.

Now I don't know about you but in my meeting, they never mentioned to me how much all this was going to cost?  They just said, pick your amount, pick your percentage.  I was shown the 1 page profile of each fund, which showed the MER.  A percentage, usually higher with more aggressive funds.  But never mentioned the cost.  So how do they get paid, they get paid from your fund that's how.  Yes I will explain.  Here come the examples.  If I invested $1,000 into 10 different companies and bought 1 stock in each company and lets say they were all $100.  My balance on my statement would say $1,000.  I would have to pay commissions to buy but that would be a one time expense.  I then hold the stocks for 20 years, never have to pay again.  The value goes up, goes down.  The only other time I have to pay is when I decide to sell the stock which makes it a 2 time expense which is usually around $10 or under.  Now what I just described was a kinda of mini mutual fund.  Now let's do the same idea but with a mutual fund.  For argument purposes, the mutual fund will buy the same 10 stocks (I know, most mutual funds have over 100 holdings but we will compare apples to apples).  You invest the same $1,000 into the fund, you get units in the fund, something like 100 units at $10 to equal $1,000.  So how do they get paid?  your balance is $1,000 on both examples?  Are you ready for this?  The mutual fund will give a price for their units and this reflects their cut or MER.  What are you talking about Peter, my balance for my mutual fund is $1,000.  An example would be best here.  You give me $1,000 for 10 chairs.  I say ok.  The chairs have a value of $980 when I buy them for you.  I give you a statement that says the chairs are worth $1,000.  I keep the $20 as my fee.  The 2% MER is working its magic.  So basically every $100 I put into the funds, I was behind 2% right off the bat because the 2% comes off whether the fund goes up or down.  They say the MER is for professional management of the fund.  I have noticed that most funds have 180 holdings or more.  Very small percentage of holdings.  There will be top 10 holdings of each fund on the 1 page profile sheet.  When the top 10 moves up or down, the fund price goes up and down.  So basically you are buying the top 10 holdings.  Why can't I copy and buy only the top 10 holdings of certain mutual funds?  If it's good enough for the professional manager, why not just for me?  The answer is you can't do that at the branch level but they don't say that at branch level, they never give you the option.  You will need a discount broker.  Which will be a different blog post.  This post is all about MERs.


Let's shock you a little now.  Jump ahead 20 years, you started saving those monthly deductions at age 25 so now you are 45 and just for argument sake, you had a decent job, and put in more than $200 a month.  Your portfolio shows a balance of $500,000 at age 45.  Very possible. The average mutual fund MER currently is 2.1% sounds like a small number doesn't it?  Well they shave off that 2.1% at a tune of $10,500 a year.  yes there is that $20 shave from earlier is now a bigger shave of $10,500 a year.  The problem with this shave is that the average person in the street does not even know this even exists.  If you keep your money in mutual funds for 10 years, you are giving up MER fees at a tune of $100,500 for those years.  This does not take into account compounding.  Thats a lot of fees,  the first time i did this calculation, I had to do it 3 times, there is no way I am giving over $100,000 in fees.  Now think 20 years instead of 10 years, that would be over $200,000 in fees.  You saved hard for so long and you give this much up in life savings?  Does that hurt yet?  It angered me once I discovered this setup.  I worked hard and some fund manager whom I have never met is getting bonuses on managing the fund?

If you run into a person who says has a portfolio of this size or close to it.  Ask them about how much their fees are?  See what their answer will be.

That is my take on mutual fund MERs, their setup, the almost no discussion of it by the bank, the advertising of mutual funds for your RRSP at the bank, the no advertising of discount brokerage at most banks, and the amount fees for holding a lifetime of mutual funds.  I won't go out completely and say all mutual funds are bad, there are good ones out there but the just the non existent discussion of fees should open eyes, especially to the everyday person.  What can I do about this Peter?  Is there an alternative?  No one has ever presented me with an alternative?  I still want to save?

Next blog.........My switch out of Mutual Funds.