What it takes to be a self-Directed Investor

Ultimately, all self directed investors need to be comfortable with the stocks they hold.  They should know what business the stocks they hold do and how they make money.  They should also have a plan for their portfolio which all contributes to a comfort level.

Have a Plan

An example would be my own portfolio.  I was very interested in dividends and found out about DRIPs (Dividend re-investment plan).  Once I got my first DRIP payment, I was hooked.  It seemed like a natural fit for me.  I truly was in it for the long run, I could hold a blue chip stock and collect the DRIP stocks every time a dividend was paid.  Then I kept reading that the dividend amount can be increased on a regular basis.  It just seemed like it was the perfect fit for me.  I did not pay Mutual Fund MERs, I paid once to buy the stock and then can enjoy the DRIPs for years.  The stock I buy could go up and down but then so could Mutual Funds, they go up and down also.

Currently, I have 37 dividend paying stocks all paying between $10 all the way up to $120 either monthly or quarterly.  Not a month goes by where there are not multiple dividend DRIPs in my account.  Annually, I already know that I will be getting 270 DRIP stocks in 2016.  This fits well with my strategy of putting my investment monies in for the long term.

Keep Learning

There are many ways to learn about financial investments.  Reading books, articles, talking with people, and taking courses are all good ways to learn.    Financial blogs are gaining popularity as a new generation of financial gurus and bloggers are revealing all the so called financial secrets to all the internet to see.  There was always a mystery of what investing in the stock market entailed.  Financial Blogs are in my opinion an untapped source of information.  Reading the right blog over time can get you as much information as you can get on a topic which otherwise would be something you would pay for from a financial advisor.  DIY investing is something everyone should look at and blogs out there have given me the confidence to explore and apply what I want my life savings to do.

Critical thinking

I figured out that there is a big difference between trading and investing.  Trading involves buying low and selling high.  This type of thinking is as old as it gets.  Investing usually involves long term holdings.  Just because you buy a stock and it goes down the next day, it does not mean you were wrong.  Also if it goes up the next day, it does not mean you were right either.  I have repeated this before and will repeat it again.  No one knows where the price of a stock will go tomorrow, next week, next month, or next year.

The basic concept of dividends being raised once a year for example, fits well with my thinking.  It's something I want in my portfolio.  It drives my research in stocks, it keeps me disciplined.  It keeps me thinking that everything will be fine when markets take a dive.

Final thoughts

A self directed investor should be willing to learn and apply their knowledge.  They should have a plan.  They should always be learning or looking to learn something new.  They should review their stock holdings periodically and review the direction of the stock to make sure it falls in line with their direction of where they want to take their portfolio.

Are you a self directed investor.  Please share your thoughts.

I can get 4.72% Dividend Yield today

I have been asked what do I mean by Yield?  I answer you can get a solid 4.72% yield right now.  The answer comes back to me.  You mean 4.72% interest.  I have to reply back and say no, I can get a 4.72% yield for the year and it's guaranteed but can change day to day, its a little different than interest.

So the conversation stops right there in frustration for most novice investors.  It's a simple fact, people prefer to get more money back so when I say I can get a 4.72% yield for the year, they automatically start thinking about what they can get at the bank, a GIC at 1 to 1.4% locked in for 5 years?  A savings account that gives you 0.6% annually?  So when I so confidently say that I can 4.7% today, they look like I am talking witch craft.  "What do you mean you can that much?  I've never heard of that before, you make it sound so easy"

To explain my situation, i would need to first explain what an interest rate is and what a dividend yield is.

Interest Rate

When someone mentions interest rates, people always go straight to a GIC or a savings account and grip about how little it pays.  A plain vanilla GIC that you can get just by walking into a bank will give you interest in the range of 1 to 1.4% locked in for 1 to 5 years.  The longer term, the higher interest rate, say 2% interest in 5 years?  A savings account currently at any major bank (this does not include Tangerine or EQ Bank) will give you 0.2 to 0.8% annually.  This is the current climate in 2016 in Canada when the word interest rates are mentioned.  These are the 2 biggest generates of money from interest rates.

Dividend Yield

Simply stated, a dividend yield  is calculated by taking its dividend per share and then dividing it by its price per share.  The end result is then expressed in percentage terms.  A lot of jargon that you as a new investor does not need.  To help you understand how this simple calculation will get you 4.72% yield.  Go to Yahoo Finance and type in BCE.TO  Bell Canada Enterprises is considered a blue chip stock in the Canadian market, they are a solid company in Television, telecommunications. internet, sports, etc.  They have raised their dividend once a year for quite some time now.  When you get to BCE.TO click historical prices, then dividends only.  You see that the last dividend payment from BCE was 0.683 and they pay quarterly.  So the calculation is 0.683 x 4 = $2.732 and now dividend that by the current stock price which is 2.732/57.83 = 0.0472 or 4.72% dividend yield.  So if I buy BCE stock today, i will get a 4.72% yield?   Yes that is correct.  Now the stock price can and will change price, it will go up or down accordingly but the $0.683 every quarter does not change, the stock price will change and this will change the dividend yield but the dividends get paid every quarter.  If they pay monthly dividends, then the calculation where the 4 was, changes to a 12.

Final Thoughts

Buying stocks to get the dividend yield has its own risk and rewards and yes stock prices can do down and up and dividends can get cut but using historical data, there are more than enough blue chip stocks that will hike dividends every and so goes the price of the stock.  This hiking of the dividends helps smooth out the volatility in the stock market.   If you want to escape the under 1.5% interest rates locked in for 5 years that the banks give you, then you need to become a DIY investor and look into purchasing dividend stocks.  Think of it this way, the banks can get the same BCE stocks that I can as a DIY investor.  The BCE stock is also more liquid where I can sell any day I want while the GIC is locked in for years.  They use your hard earned money that you put into the GIC and take that money and they can buy BCE stock, they will get paid by BCE a yield of 4.72% and give you 1.4% in return.   It's a no brainer, the banks are making money on your money.  That term has been used for many years but finally I figured out one of the ways they were doing it.  You as smart investor can stop this cycle and get that 4.7% instead of the banks.  This is in my opinion, smart money, you money is working for you in one of the best ways it can.

If anyone has a question on dividend yields or interest rates, please leave a message.

Top 5 Canadian Financial Websites to add to your favourites

There are a slew of financial websites on the internet.  Some big, some small, some backed by big names and some with better content than others.  Some with more up-to-date  information than others.  Some with dedicated columnists and others with valued opinions.  All assist you, the investor in making sound financial decisions with timely information and thought provoking articles.

Here are the top 5 Canadian financial websites with commentary:

CNBC.COM

Is a U.S. based website that concentrates on the U.S. markets and the other major indexes including Asian and European markets.  Commodities are up to the minute even when the North American Markets are closed as Asian and European markets all trade the price of a barrel of Crude, so this site is great for keeping tabs on the price of Crude.  Also includes the PRE MARKET index which shows what the markets will before the opening bell at 9:30 am for U.S. indexes.  Strange that the Canadian TSX is not mentioned on this site at all.  Write ups and articles are very well written and thought provoking.  Popular columnist is Mad Money Jim Cramer.

CNBC visit site

GLOBEANDMAIL.COM

Started out as a financial newspaper and has expanded to be a leading Canadian financial news website.  Since it is still a newspaper, there are other sections on the website like Sports, Lifestyle, and condo news.  But my favourite sections are business and Investing.  The investing section has a sub section called Investor Tools which is great.  When announcements occur in the Canadian markets like mergers or dividend hike announcements, here is where you will hear it before most other sites.  Columnists include Rob Carrick and John Heinzl.  The only drawback is your IP address only allows you 10 free views a month on this site, unlimited viewing is like $1 a month.  Tickers are delayed 15 mins and only start when the markets start.

GLOBE and MAIL visit site

FINANCIALPOST.COM

Basically he business section of the NATIONAL POST.  Well thought out articles and topics that relate to the investor, no matter style of investor they are.  They have sub sections called Investing and Personal Finance which are well organized and provide valuable insight into topics that Canadians can relate to.

FINANCIAL POST visit site

MOTLEY FOOL

An international site with divisions in each country.  You want to choose FOOL Canada.  Great articles, when you finish reading an article, you feel that arguments for the buying or selling of a certain stock are valid.  Focuses primarily on the investor looking to buy stocks in a company but needs more information to justify the purchase.  So a lot of stock picking articles.  They do it well with their titles of their articles.  They have a ticker but it is not as good as BNN or CNBC.

motley fool visit site

BNN.CA

The Canadian version of CNBC.  The BNN channel on television is very well laid out.  They have tickers on the indexes and stock tickers.  Business news in flashing on the channel also.  Very creditable with well know analysts, portfolio managers, and CEO's of companies appearing as guest speakers.  Larry Berman is a popular guest speaker.  Website shows everything that is on television.  Certain analysts have moved stock prices with their comments before on this site.  With that being said, something must be good here if someone on the show can move a stock price with their words.

BNN visit site

Did I miss any sites?  Please let me know.

Thanks

Comparison: Mutual Funds vs ETFs

By now, hopefully everyone has at least heard of ETFs or Exchanged Traded Funds.  We could call them the cousin of the Mutual Fund.  The ETF industry has grown a lot over the years but is still a distinct second in the race for Canadian Investor's dollars.  In 2015, ETFs did do record sales but only accounted for about 10% of the market in terms of Investor's Dollars.  Without further delay, here are key points in the difference between Mutual Funds and ETFs:

Mutual Funds

• Can be purchased at most banks and other financial institutions or self directed accounts
• Holds securities usually dictated by the direction of the fund, usually in the hundreds
• Average MERs or Management Expense Ratios for Mutual Funds in 2015 was 2.3%
• Usually includes front end (when you buy) or back end fees (when you sell) 
• The advisor gets from the fees called a Trailer Fee
• Price of the Mutual Fund is determined at the end of the day

ETFs

• Can be purchased only using a self directed account or until recently using the BMO Smartfolio products.
• Can hold securities dictated by the theme of the ETF but can also be very focused in their selection, sometimes holding only 6 stocks.
• ETF fees are amazingly small, an index ETF can be had for as low as 0.2% vs it's mutual fund counterpart Index fund' MER of 2.1%
• There are no front end, back end or trailer fees.
• You do have to pay the commission to buy, which currently all banks have their brokerage fees at $10 or less
• Is traded like a stock so there is a ticker and can be bought and sold several times in a day.
• Dividends are yours to keep or can be setup in a DRIP (dividend re-investment plan)

Final Thoughts

The biggest difference between Mutual Funds and ETFs is for sure the Fees.  The banks are very quick to advertise the magic of compounding and how if you hold your Mutual Fund for 20 years, $1,000 will grow to this number.  That is true but they never talk about how the Fees are also compounded.  The magic of compounding fees can be summed up this example : a portfolio of mutual funds totally $500,000 will pay a fee of $11,500 a year (using the average of 2.3% in 2015).  Assuming no new money is added during a 10 year period, the total fees in 10 years will total $111,500 assuming no compounding.  Now do that math again, it is a true number.  Do you know that you are spending this amount in fees in a 10 year period?  This is only at the bank level where you get $500 automatically taken out of your account and divided among the mutual funds they asked you to pick.  If you had a financial advisor who would pick the funds for you, tack on an additional 1% to bring the fees to about 3.3% a year.

ETFs are definitely better for the average investor but ETFs can only be purchased using a self directed account.  Most investors think buying and selling ETFs is hard.  In my experience, setting up the appointment at the bank and signing the papers was the hardest part.  If you bank online, you can invest online using a self directed account.  

BMO Smartfolio is a bank product which enables investors to not open a self directed account but can gain access to ETFs and their low fees similar to a mutual fund setup through automatic withdrawals.  The BMO Smartfolio gives investors the ability to access lower ETF fees with a big of hand holding since they only offer BMO ETFs.

To buy and ETF, you only pay the $10 and put in your order.  If you were to buy $10,000 worth of a mutual fund, you would pay $230 every year as long as you hold the mutual fund.  If you were to buy the same type of ETF, you would pay $10 for the $10,000 but the ongoing fee would probably be in the area of 0.5% or $50 a year.  Now that is comparison shopping there.  $230 vs $50.  I bet most people would go with the $50 but then again they spend more time deciding on $1.99 or $2.49 toothpaste.

Selling a mutual fund sucks.  It's like it is stuck in the 1980's.  If you want to sell a Mutual fund, you need to call in, identify yourself and then tell them you want to sell the fund, but be warned, get this call in before 11:00 am or you won't get the price at the end of the day at 4:00 pm.  With ETFs, the price is listed instantly and you can decide to buy or sell right there.  Just like online banking.

Last thought, more Canadians need to understand that there is a better fee for your investments and the quicker they understand, the quicker they can invest their way without fees holding them back ($110,000 in 10 years)

The Balanced Mutual Fund - sounds great but look again

There will be investors that are in Mutual Funds.  They have been in Mutual Funds from their 1st dollar invested and no matter how many people tell them that they are paying way too much (see my post on Mutual Fund MERs) they will stay in them no matter what.

RBC Mutual Funds

Here is the link to the RBC Mutual Fund Listing.  If you must stay in Mutual Funds.  You can still reduce your investing costs.  Avoid the Balanced Fund.  Now the name sounds safe, secure, almost like you are covering all your bases.  You are investing in safe and risky.  You are balanced.  A balanced fund in my view can bring confusion and complexity to an investor's portfolio when making it simpler is often best.

Going to our example of the RBC Mutual Funds.  Go to fund RBF272 Balanced Fund.  The MER is 2.16% and if you drill in.  Look at the top 10 holdings.  The names that stand out are RBC, TD, BNS, and Suncor.  Now go to fund RBF556 Index Fund.  The MER is 0.72% and if you drill in again, the top 10 holdings include RBC, TD, BNS, BCE, BMO, Suncor, and Enbridge.  Now there are a lot of duplicate holdings in these 2 funds.  The problem is a lot of investors could and I am sure they have picked both funds.  Now the huge difference is the MER.  2.16% vs 0.72% for almost the same holdings?  I think you can see where I am going now.

Now all Balanced Funds are created differently, while Index Funds are just that, they match the index in their allocation.

Here are 3 reasons why Balanced Funds are bad for you:

1. Who is the Fund Manager?

The Balanced Fund lets a complete stranger decide what he considers the best balanced allocation is for the Fund and this in his view is suppose to satisfy everyone's investment needs in the fund.  Highly unlikely.  The investment needs of an investor should be in the hands of a financial planner not in the hands of the Fund Manager who may not even be in the same province that the investor lives in.

2. CASH BALANCES

What do I mean Cash Balances?  Well not all but some balanced funds have cash balances of almost 5%.  If you look at the year end or quarterly statements, they will most likely be a section that indicates the fund is holding a cash balance.  So that means you are paying the MER for someone to hold CASH?  And the MER is high too, too much cash means too much of your money is not working for you but instead is helping fund the MER paid to the fund manager.

3. FEES

I left the last item called Fees or MERs.  The MER applies to the entire Mutual Fund industry but for this post, the 2 RBC Mutual Funds are great examples of what to look for.  The fact that Canada has some of the highest MERs in the world and is repeatedly publicized and discussed but ignored by investors tells how powerful the industry has brain washed us into thinking Mutual Funds are great.  While a balanced fund can charge higher fees than its Index counterpart, I would rather own the lower fee just for the sake of a lower fee.

Final Thoughts.

Do not let the name, balanced fund confuse you.  You are not balanced at all,  there is no balance.  It is just another fund where the allocations are picked evenly.  This is definitely not worth your hard earned MER.  Go Index Fund.

Do you have too many mutual funds in your RRSP?

Once in a while, co-workers or friends ask me about their personal financial situation.  In particular, their RRSP and investments.  They have heard me say over and over again "there has to be a better way".  They seem to think I have a golden conversation where after we part ways, they will be richer in money and heart.  Well I am more than happy to start the conversation off with, are you buying mutual funds at the bank?  The answer almost every single time is yes.  Right there, that is my golden egg idea.  Get out of mutual funds.  The problem is not everyone is happy to hear this, they have squirrelled away savings every year to their RRSP into their RRSP is at the bank level which means 95% of the time, their money is in mutual funds.  Switching out of mutual funds to either individual stocks or ETFs is my golden egg moment where I save the investor hundreds of thousands of dollars over X number of years. (read my post on mutual funds).  You see, no one likes to be told what they have been doing for 15 years is wrong.  I was in that boat and asked "there has to be a better way" and found out about MERs .But we won't go into that in this blog.  This blog will will focus on the RRSP bank mutual fund investor having too many funds.

Yes, there are people who will stay in mutual funds all their life.  So be it, it will happen.  But if I ask that person, how many mutual funds they have, the answer most times is "I don't know".  They usually get back to me in a few days and report that it is over 10 funds.  I am all for diversification but is owing 10 plus mutual funds really beneficial to you, the investor?

In my humble opinion, a DIY Index investor in Canada can get completely diversified with 4 mutual funds.  A Canadian Bond fund, A Canadian Index fund, A U.S. index fund, and an International fund. If anything happens in the markets, you will not be left behind.  To save even more, instead of mutual funds, the 4 types of funds can be purchased using ETFs, remember ETFs have a much lower fee than their mutual fund counterpart, usually with the exact same holdings.  A popular low cost option for ETFs are the TD e-Series line of mutual funds.  My 4 picks to absolutely remain diversified on the cheap are:

• TD Canadian Bond Index - e (TDB909)
• TD Canadian Index Fund - e (TDB900)
• TD U.S. Index Fund - e (TDB902)
• TD International Index Fund - e (TDB911)

It's ok to add 1 or 2 more funds to expose your holdings to say Oil and Gas, or Real Estate but the above 4 will cover everything happening in the world for Canadian investors.

Too much diversification

If you have too many funds, there will be over lap in your holdings.  How do you see this?  Check the top 10 holdings of your mutual funds.  You will see a lot of Banks, Telecos, Insurance companies in Canadian Mutual funds.  Why would I hold 3 different funds where the top holdings are all basically the same?

It might be ok to overlap with your workplace RRSP.  Most workplace RRSPs only offer mutual funds.  There is no way around that so over lap will have to happen there.

Bring in the financial advisor

I don't want to stereotype financial advisors but why is it that they area always recommending new funds?  They charge their commission on the funds they sell to their clients.  No one can predict the ups or downs of the market so why is the financial advisor more qualified to do this guess with your money.  

My golden egg - final thoughts

So there you have it,  my golden egg conversation.  Get out of mutual funds, you will save the MER (do the calculation and you will see) and diversify on the cheap.  Whatever happens with the market, be it up or down, you will not be paying the high mutual fund MER.