How to invest in the market

A friend has asked me about investing in the market. A damn fine idea, I thought. The money I've earned in the market over the years has kept more than one wolf away from my financial door.

The friend also asked me if I had a stock broker. The answer: no. I  have a TD WebBroker self-directed investing account. Many Canadian banks have a self-directed investment arm. For instance:

• The Bank the Nova Scotia has Scotia i-Trade.
• The Royal Bank has RBC Direct Investing.
• The Bank of Montreal has BMO InvestorLine.
• and of course there's TD WebBroker
• and there are more. Google it.

The cost to open and operate a self-directed investment account varies from bank to bank. Many, possibly most, charge about $10 per trade, either to buy or to sell. There is no charge for holding stock, ETFs, mutual funds and such inside your account as long as you maintain a certain dollar amount in your account. This amount varies from bank to bank. For instance, at the TD, if all the accounts in one household have a cumulative value of $15,000 or more, the $25 per quarter maintenance fee is waived. There are other ways to avoid the maintenance charges as well. Here is link to the TD Direct Investing Disclosure of Rates and Fees. Again, before signing on the dotted line, google the other banks. Do some shopping.

Once you have set up a self-directed account, immediately deposit some money, hopefully enough to avoid the quarterly maintenance fees. If you have no stocks on your radar, an investment savings account may be the place to stick the money. The TDB8150 investment savings account calculates interest of 1.6% daily and pays monthly right now.

• TD Investment Savings Account (TDB8150)
• Minimum opening balance: $1000
• Current rate of interest: 1.6%
• Minimum subsequent deposits: $100

At this time, the subsequent deposit rule applies even if you have allowed the balance in your TDB8150 account to drop below $1000. And there is no charge for making a deposit or a withdrawal. Plus, there is no minimum term during which a deposit must remain in the account.

If you cannot wait to put some money in the market but you are not sure what stocks you want, you could buy an entire portfolio in an etf. Called asset allocation ETFs, the three product lines that I am most familiar  with are from Vanguard, iShares and the Bank of Montreal.

• Asset Allocation ETFs
• Vanguard
• iShares (XBAL and XGRO)
• Bank of Montreal

Once you have a self-directed account, a world of investment suggestions will open up. Be careful. As the old saying goes, if the folks giving you the advice were so smart they probably wouldn't be pounding out investment suggestions to the uninitiated.

As a TD WebBroker client, I can avail myself of a number of different investment advice streams. Here is but a smattering of what is offered.

• TDSI Action List - Our Best Ideas (This comes out around the first of each month.)
• TDSI Morning Action Notes (This comes out every morning the market is open and is updated over the course of the day.)
• Morningstar Canadian Core Pick List (This comes out around the first of each month.)
• Morningstar Canadian Income Pick List (This also comes out around the first of each month.)

There are more lists and suggestions but you get the idea. I treat these tips like seed crystals. I like to see the tip grow, get added to, confirmed, polished and then I may buy.  To do this the first step is to look at the info posted by, in this case, WebBroker.

This is the Peyto Exploration & Development Corporation page. I own some PEY. When I bought PEY it was a four star stock according to the Morningstar Quant Report. Four stars means it is selling for less than its fair market value. Five stars are the maximum.

Below the stars are a line of icons showing various reports from different companies with each report discussing PEY. I take most of these with a grain of salt, as they say.

Do you see the line that starts Overview, Charts, News, Fundamentals and Earnings? I find the info under Fundaments very informative. For instance, PEY is yielding 6.86% but it has a Payout Ratio of only 39.18%. This means PEY is not straining to round up the money to pay its dividend.

Although PEY is not earning as much as the industry average, it is profitable. Its Return on Assets (ROA) is 4.22%. This is better than the industry average of 3.04%. Its Return on Equity (ROE) is 8.99%. This is also better than the industry average: 5.71%. From the Fundamentals page I learn, "PEY has one of the highest ROEs of all companies in the Oil & Gas - Integrated industry."

So, why is PEY losing value if it is so damn good? A click on the next tab, Earning, will give us the answer. Total revenue has been dropping since 2014. Unfortunately, the operating expenses are holding steady as revenue falls. The result? The net income is falling. It is gradual but it is on a downward slide.

There is one more place to check. Click on Analysts. Look for the yellow "New" tag.

After seeing all this, I have kept my PEY. I have about one half of one percent of my total portfolio invested in PEY. If it heads south, I'm not going to lose sleep. But if it continues to pay even half its present dividend without losing too much value, I'm happy. Right now, with it yielding 6.86%, I'm ecstatic.

Now, for my biggest and most important investment tip. Be prepared to lose money. Markets have names for money losing situations: corrections are losses from 10% to 20% and bear markets are losses greater than 20%. The average bear market is said by some to lose about 30% and last for just more than a year. Remember that's the average. It can drop more, lots more, and a bear market can last longer, a lot longer.

The trick is to buy when the price is right, to buy when almost everyone else is selling. I got some of my bank stocks, now selling for around a hundred dollars a share, for less than half the present price. I got both my Fortis and my Emera for about 30% less than what is presently being asked. I've sold some of my Emera so if it drops, and it will eventually, I will have locked in some of the profits.

Lastly, if you know other folk who are interested in investing, form an investment group. Get together and share information. Share book recommendations along with stock tips. If different members use different investment firms, the club will have a very rich source of investment reports. There will be some overlap but there will be gems to share.

I started this by saying I had a friend looking for some info. This was written for them. I hope it will be of value. Cheers!

I vote for stocks in retirement today and not for bonds: comments?

I've been asked why I am posting so few updates and new articles. The reason is simple: I'm a retired senior who started this to encourage discussion and it hasn't happened. I'm not a financial expert but only a senior trying to make ends meet at a time when interest rates are at historic lows.

With interest rates so low, it is possible to earn less on one's retirement savings than one loses to inflation. I see this as negative income. (An oxymoron.)

Before retiring, I worked as a journalist at a newspaper. I was mainly a photographer but I also wrote a couple of columns and took third place in a journalism competition one year. I thought some of the journalists with whom I worked would jump at the chance to discuss some of the stories that run in the newspaper. But there was no interest.

Take the story that ran last weekend in my local Post Media paper. The story was right: the problem of where to put one's retirement savings is complicated. That said, the article failed to deal with the complications by failing to take a firm, positive stand on the historically good reasons to hold stocks rather than bonds.

I hold no bonds directly. Why not? I cannot afford to. It is that simple. I aim for an income of at least 4% on my retirement funds. That yield is not possible with bonds unless one starts depleting principal.

I'm waiting for the next big correction, more than 15%, or the next bear market, a drop of more than 20%. My present strategy, and it may change a little, is to build the following portfolio:

2%       Canadian Imperial Bank of Commerce (CM)
2%       Enbridge (ENB)
1%       H&R Real Estate Investment Trust (HR.UN)
2%       Inter Pipeline (IPL)
2%       Peyto Exploration & Development Corp (PEY)

The above stocks are all highly respected and deliver a fine dividend with a promise of an increase in share value over time. These stocks give my portfolio yield a nice hit of dividend income.

18%     iShares Canadian Select Dividend Index ETF (XDV)

 The above gives me more exposure to a wide range of Canadian dividend paying stocks. Diversity is good.

 37.5% iShares U.S. High Dividend Equity Index ETF (Cad-Hedged) (XHD)
17.5%  Vanguard FTSE Developed ex North America High Dividend Yield Index (VIDY)

The above ETFs give me exposure to markets outside of Canada, and even the States, while continuing to deliver good yield.

15%     2-year maturity GIC paying 2.44%
3%       Cash held in and paying 1.6% in TDB8150

I went with a GIC rather than a bond fund or bond ETF as the GIC has a definite value. Most bond ETFs never mature, they are sold a year before maturing and are replaced with more bonds. The value of the fund will go up and down. One can lose money and this is defeats the goal of owning teh bond fund or ETF.

Add up all the percentages shown above and you should get 100%. Oh, I do hope so. For stories like this an editor is not a luxury but a necessity.

I'm hoping to realize about 4.25% yield and thus be able to keep the wolf away from my door for another year in retirement. So far I have gone for ten years and removed about 3.5% annually to live while seeing my overall portfolio grow some 60%.

As the Post Media article correctly points out: This strategy only works if you stick to the strategy when markets are down. But the flip side, the owning bond side, simply doesn't work in today's climate. If I had gone into bonds, say 40% or 50% bonds as often advised for retirees, my principle would most likely be diminished today. I'd be depleting my principal rather than growing it.

I look forward to any comments but I'm not holding my breath.

Thoughts on RIFs and TFSAs

First, an overview. I have a RIF. Each January I move the mandatory withdrawal as an in-kind transfer from my RIF to my TFSA and, if I run out of contribution room in my TFSA, I move any remaining funds to a non-registered self-directed account.

The contribution room in a TFSA is the sum of the annual contribution room plus the total amount of withdrawals made in previous years and that have not been replaced.

My TFSA is filled with good, solid, dividend-paying stocks. I withdraw the dividends to live in retirement and I replace that withdrawn dividend cash the following year with dividend paying stock of equal value.

The contribution room in my TFSA is not large enough to hold the entire in-kind RIF mandatory withdrawal. I transfer the remainder to my unregistered self directed account. I also remove the dividend cash from this account to live in retirement. As this is dividend income from Canadian companies, the tax is paid at the reduced dividend tax rate.

Some of the stocks in these accounts are paying a very handsome dividend. For instance, my HR.UN REIT pays 6.31% today. Click the link to discover what it is paying today. Another, EMA, is paying 5.15%. Each year, the amount of stock grows and the dividend income increases.

Stuff to watch:

• Annual minimum withdrawal amount from your RIF. Make sure you withdraw enough.
• If it's a LIF, you must know both the minimum withdrawal demanded and the maximum withdrawal ceiling. Do not withdraw more than allowed.
• Keep your own TFSA records. I find my records are more up-to-date that the government ones, at least early in the year. Check the TFSA contribution room very carefully. Do not over-contribute to your TFSA.

Overall view of RIFs
Receiving income from RIFs
Making or replacing withdrawals from a TFSA

Something to note: there is no withholding tax on minimum withdrawals from RIFS but, and it is a big but, you must pay tax in the following year. For this reason, when I remove the dividend cash to live, I tell the bank to withhold 30% for income tax. This amount is large enough, at the moment, to cover both the tax bill on the in-kind withdrawal and the tax on the cash withdrawal.

My hope is that I can shrink my RIF fast enough to prevent the increasing withdrawal percentage from forcing me to part with some of my stock.

One last caveat: take care not to have too much income and trigger the old age security clawback. For info on this see: Old Age Security pension recovery tax.

If you are familiar with how a spreadsheet works, I have found setting up a spreadsheet makes tackling all of this quite easy. My TFSA contribution room numbers are always up-to-date and trustworthy. I've found the government TFSA contribution room estimates are about a year behind in January. If I went blindly by the number issued early in the year by the government, I'd be in big trouble. When you understand how the number was calculated by the government, the reason for the problems will be clear.

Comparing investment approaches or apples to oranges?

If you've read my post before this one, you will know that I am running a test of highly respected and frequently recommended investment approaches. I like to describe what I am doing as comparing approaches. My hope is that this description will sidestep the "comparing apples to oranges" criticism. And it's a very valid criticism, I might add.

A portfolio that is one hundred percent equities is clearly going to be more volatile than one that contains a good percentage of bonds. A volatile portfolio has wider swings in value. In good times the one hundred percent equity portfolio will soar higher and during corrections or bear markets it will settle deeper into the financial hole. Bonds in a portfolio smooth out the ride somewhat. The more bonds the smoother the ride.

The market, so far this year, has been performing very well. Therefore, it is no surprise that the Morningstar Canadian Income Portfolio is leading the pack. It is a one hundred percent equity based portfolio.

Likewise, it is no surprise that my own personal portfolio is doing well. You see, I have jettisoned almost all bonds from my holdings. There are a few hiding in a couple of mutual funds. (Yes, mutual funds. I hold my head down in embarrassment. Why do I hold these two monthly income funds? The two funds are my weak attempt to soften the great volatility my portfolio endures.)

I need the dividend income to live in retirement and have made a conscious decision to suffer through market pullbacks in return for increased dividend income. I must confess, it is a tough ride. I only succeed because my wife has nerves of steel.

My test, so far, is revealing what we could have surmised from the various portfolio compositions. More bonds, less benefit from a rising market. Portfolios with a high equity content are outperforming in this market.

So, why do a test like this at all? Well, for one thing, it appears the Couch Potato Assertive Portfolio  based on ETFs is, for me, a better bet than the Couch Potato Portfolio that uses the e-Series funds from the TD. I have pitted these two approaches against each other in the  past and each time the e-Series portfolio tends to trail the ETF one. Note the word tends. In the past, the e-Series portfolio has outperformed the similar ETF based portfolio now and then.

And there has been one big surprise: XGRO, an entire portfolio in one ETF, is doing mighty well. It is holding down second place this morning. And it contains a few bonds. Nice. I may give XGRO a look for my granddaughters' RESPs.

Comparing suggested investment approaches

I used equal amounts of money to create each of the following investment portfolios. One portfolio is labeled Our Portfolio Almost; the important word is almost. The investments reflect my own approach to investing but the amount of money used is but a wonderful dream. Forgive me, but one has to dream, don't they?

The year is only seven days old. The competition is too young to draw any firm conclusions. That said, I  find it interesting to note the Morningstar Canadian Income Portfolio is away ahead of the pack with a current value of $777,515.47. That's thousands of dollars ahead of the second place portfolio.
 

I am actually tracking more than the five portfolio approaches shown but I feel these five are the most interesting. If the ones not shown should have more success in the future, I will display those results as well.

The present line-up first to last is:

1. Morningstar Cdn Income: $777,515
2. Our Portfolio Almost: $773,170
3. XGRO ETF: $772,653
4. Couch Potato E-series Assertive: $770,219
5. Couch Potato ETFs Assertive: $769,931

The XGRO ETF is a complete growth-oriented portfolio in one iShares ETF. Very interesting, eh? This ETF offers one stop shopping for the newbie investor.

Don't count the Couch Potato Assertive portfolio out. I've run competitions like this before and the Couch Potato Portfolios were often in first place or near the top.

At the end of the year, I will look for two things: overall value of the portfolios and the dividend income delivered. Being retired, I  put a lot of weight on dividend income. I can live with paper losses but I need those real dividend dollars to live.

I should note that in years past, the great strength of my own investing philosophy has been the generous dividend income. This time I am not so cocky. The Morningstar Portfolio promises to deliver a third more in dividends than my approach.

The story tells itself

Last year I opened five test portfolios, each had an opening balance of $10,000. The TD Dividend Growth D-series was easily the best mutual fund investment of the five. The D-series is only available to those with self-directed investment accounts. The perk encouraging investors to use the D-series in the reduce MER compared to say the I-series.

Other than the MER, the two mutual funds are the same. Note how much better the D-series performed compared to the I-series.

The TD Monthly Income D-series performs better than the same fund in the I-series. Thanks to the balanced mix of the fund, it contains a lot of bonds, it tends to be less volatile than the dividend growth fund. It neither climbs as high during good time, nor dives as far down during the bad times.

Read the names of the funds. Clearly the Comfort fund does not deliver much comfort. It did not come anywhere near performing as well as the simple dividend growth fund. And the retirement fund would keep me up nights. It failed to perform. It hardly left the starting gate. The clue that these two might be slugs were the words comfort, retirement and conservative.

If you are going to make real money in the market, you are going to have to take some risks. This means investments like the dividend fund are usually a better bet. You may lose in the short run, but in the end, if you have the guts to hang tough, you should come out far ahead of the conservative competition.

And, one can always mix the funds one buys. Some in a U.S. Index fund, some in the TD Monthly Income to add some bonds and some in the Dividend Fund for income and increased growth. I've done some tests of such mixes and all the tests have performed rather well. In fact, I'm running another one of these tests right now. Come back in six months and I may be posting some of the first  results.

It's January 4th and there are reasons to smile

The market is down. My wife and my retirement is down in the large five figure range. And I am smiling. Read on and learn why.

Each year a minimum amount of one's RIF must be withdrawn by law. The minimum percentage that must be withdrawn is set by the Canadian federal government. Charts of this are readily available online. This year we are forced to withdraw a full five percent from our RIFs.

Judy and I do not remove this money in cash but we remove it in-kind by transferring a block  of stock equal to the minimum withdrawal to our TFSAs. If there is not enough contribution headroom in the TFSA to absorb all the withdrawal, we transfer the remaining stock to a non-registered self-directed account. Of course, there is always a small remainder that must be transferred as cash. The cash value is always an amount less than the value of one share of the stock being transferred.

The nice thing about this in-kind removal is that the tax does not have to be paid until next year. There is no withholding tax applied to the minimal withdrawal from a RIF or LIF. The stock can sit accumulating dividend income in one's TFSA until next year when the tax comes due.

Now, this is where it gets really good. We need money to live. There is no maximum amount restricting how much one can withdrawal from a RIF. Sadly, with a LIF there is a maximum but one must just deal with that problem when it arises. So once a year, we remove all the dividend income earned by our RIF. We tend to make this withdrawal a few days after completing and checking our in-kind withdrawals. We try to keep the withdrawal to no more than four percent but it can be more if we made more and I don't worry unduly about it. We still have all our stock. And we always have 30% deducted for income tax. This is high but it ensures that come next year we will not face a huge tax bill related to our in-kind transfer. In fact, I see us getting a refund. Yeah!

With TD Direct Investing clients must call the bank and make the in-kind withdrawals with the assistance of a stock trader. I find calling just before the markets open is the best time to call but I make no promises. I always have all relevant information available:

• RIF account number
• amount of mandatory withdrawal
• stock to be transferred
• TFSA account number
• TFSA contribution headroom available (Check this carefully. Do not over-contribute.)
• Non-registered account number
• Do all the math in advance. This is important. The bank reps are busy. Mistakes happen. There are often calculations that must be done to determine one's TFSA contribution room. The bank rep may not have those numbers. And with LIFs one must subtract one's in-kind withdrawal from the maximum withdrawal to come up with the cash withdrawal amount. Do not over contribute to a TFSA or over withdraw from a LIF. 

The nice thing about the market being down right now is that we get to move more stock to our TFSA and then it sits there producing a stream of dividend income and eventually a nice capital gain.

My wife and I are nicely set for the coming year.