Sep 042021
 

I haven’t had many ideas for articles lately so I thought I’d just revisit some of the idea’s I’ve shared on this website. Specifically what has been working for me as of mid-2021. Disclaimer that these are my personal results and your mileage may vary. Lets get started in no particular order:

Broad ETFs and Index Funds

Rating: A

Index funds have been my bread and butter, and I’ve tried to keep at least 70-80% of my investments within them. They are simply the easiest way to consistently build up your portfolio. Your returns will never be amazing, but they’ll always be good. And if you string enough good investments together you’ll be doing great. Just look at VFV, one of my earliest ETFs that tracks the S&P 500. It has gained nearly 300% since 2013 with a consistent upward trend. Sure it’s been a bull market nearly that entire time, but even in major downturns the S&P 500 has recovered quickly.

I am completely confident in admitting that, if I had just stuck with broad market ETFs like VGRO or VEQT, I would be ahead of where I am now. Don’t be tempted by the siren call of Wall Street Bets YOLO tech investing.

Blue Chip Dividend Companies

Rating: B

A couple years ago I slowed down my contributions to ETFs and started investing mostly in Canadian blue-chip companies like Bell, Canadian Utilities, Fortis, Manulife, Brookfield, and the major 5 banks. These have largely performed well but have a few disadvantages.

  1. Dividends – If you hold these in a taxable account, you’ll be taxed on the dividends every year, which will reduce your overall gains compared to a swap ETF like HXS. Obviously if you hold these in your TFSA or RRSP you will avoid the tax, but any US dividends will be subject to US withholding tax as well. Although ETFs are not immune to these same issues. Also eligible Canadian dividends do have favorable taxation.
  2. Commission Fees – Unlike ETFs, buying an individual stock isn’t free. As a result it’s not worthwhile to purchase small amounts of shares. With ETFs you can buy a single share as soon as you have the funds to do so. In order to make up for the commissions you need to buy the stock in large blocks, normally $1000+, which leads into the next issue.
  3. Diversification Loss – Proper diversification requires you to buy many companies across many industries. As mentioned you’ll need to purchase in large blocks to avoid large commission fees. Thus you’ll need a lot of money to be properly diversified. Furthermore you’ll probably want to keep your money in CAD, so you’ll be buying mostly Canadian companies, and thus you’ll be overexposed to the Canadian market. Nothing can beat the diversification of ETFs. VCN will exposed you to the entire Canadian market and VUN will give you the entire American market and you can get a share of each for about $120 and no commissions.
  4. Complexity – Lets say you now own 20 companies and think you’re diversified enough. Now you have to keep an eye on those 20 companies. Sure, they’re blue chips and shouldn’t need to be watched, but your account will be clogged with many holdings, compared to just a few ETFs, or only one if you go for VGRO.

Conversely, individual stocks tend to have higher dividend payments than ETFs. You will also save on ETF management fees (MER). So is it worth it? Maybe. It’s up to you. It doesn’t hurt to have a few Canadian blue chips for companies you believe in, but if you also own an ETF you’re just increasing your exposure to some specific companies.

One more point about dividends – when a dividend is paid the stock will drop by the exact amount of the dividend (although in practice it’s difficult to see with the normal daily fluctuations). Thus a divided can be thought of as reducing the total share price by the amount of the dividend. If you are trying to build wealth it almost never makes sense to sacrifice share price for income. Especially if you will be taxed on that income in the current year.

Ultimately it’s very satisfying to see a real deposit enter your account, and despite my complaints above I’ll continue to own some dividend stocks.

REITS (Real Estate Investment Trusts)

Rating: C

I used to think REITs were amazing, and I still think they are a good idea in small amounts and specific scenarios. Ultimately they carry a lot of risk and are mainly good for generating income rather than generating wealth. The problem with REIT income is that it’s not subject to the favorable tax rates like eligible dividends from Canadian blue chips. Again, not an issue in your TFSA or RRSP but in a taxable account you shouldn’t even bother.

Furthermore, REITs tend to have very little, if any, capital appreciation. All the value comes out in the dividend, which will then be taxed. And let’s say you were as foolish as I was and you invested in Morguard. They specialize in retail and office space. Not a good industry to be in during a pandemic works and shops from home.

REITs are good for generating income in retirement and getting exposure to different real estate markets, but I would have been better off just buying VGRO.

Buying Stock Options

Rating: F

Yes I admit I dipped my toes in the world of options trading in the style of Wall Street Bets. I would buy put options if I thought a stock was going down and calls if I thought it would go up. I actually had a few successes where I tripled my investment. The problem was that every winner came with two losers.

Lets say that you think a stock will go up. Seems to be a pretty safe bet, stocks normally go up. But if you’re buying an option you need to correctly predict exactly how much it will go up and by when. Say XYZ stock is currently trading at $90 and you think it will reach $100 by next Friday. You purchase a call option for $5. One of three things will ultimately happen after the option expires:

  1. The stock goes up higher than $105 ($100 + the option premium). Congratulations you’ve made money!
  2. The stock just barely goes up and ends at $98. Sucks to be you! Your option slowly decayed and eventually expired worthless. Maybe XYZ stock eventually did go above $100 after your option expired. You were right on the direction but wrong on the timing. Too bad.
  3. The stock goes down to $90. Well that’s not good, your investment just dropped 50% overnight! You can sell at a massive loss, and if you don’t, you’ll likely get a 100% loss.

So if the chances are roughly equal for each of those results (stock goes up, down, or sideways) you’re going to lose 2/3 times. Don’t do it. Don’t listen to Wall Street Bets. Just go to the casino if you feel like gambling.

Selling Stock Options

Rating: B

Options are a zero sum game. For every buyer there is a seller, and for every winner there is a loser. Thus if I’m the loser 2/3 times when I buy options, then maybe I’ll be the winner 2/3 times when I sell options?

On paper, selling options sounds horrible. In the example above, as the seller the maximum I could make is $5/share, but if the stock ran up to $200 I would lose about $100/share. There is a fixed maximum profit, the premium, and near unlimited downside.

In exchange for this crappy deal the odds are in your favor. I normally only trade if the chance of success is above 70%. The winnings are small but consistent. And the losses are normally salvageable.

My options selling strategy is referred to as “the wheel”. I won’t get into it now but it involves selling cash secured puts and covered calls. I’ve been using it for about six months, which is longer than I was buying them. And so far I’ve been earning money on about 4/5 trades and completely made up for my losses from buying options.

“Wow that’s great” you’re thinking. Well not so fast. It’s still playing with options which tends to magnify your gains AND losses. The market has been on a very steady uptrend for the past 5 months, and when it eventually corrects I expect my losses to be magnified. Hopefully the gains I’ve made up to that point will make up for future losses.

I plan on continuing to sell options until someone or something convinces me otherwise. I do NOT recommend this as a casual trading strategy. It’s the most complex strategy I use and it’s difficult to learn. Literally every single person I’ve explained it to has not been able to comprehend it (which is maybe more my fault than theirs). This is not me patting myself on the back, it’s just my experience. If you’re still interested, you can search “the wheel”, “cash secured puts”, “covered calls”, or check out my attempt to explain it.

Conclusion

Just buy index funds. If you want to branch out, get some bank stocks. Maybe telecoms like Bell or Telus. If you’re restless you can look into options with a paper trading account. Don’t be tempted to buy options. Selling covered calls or cash secured puts is more reliable.

Dec 272020
 

The Big Short investor, Michael Burry, who predicted the 2008 financial crisis, is now predicting that passively managed ETFs are the next bubble. He’s comparing them to the Collateralized Debt Obligations (CDOs) which were the main cause of the market meltdown of 2008-2009. Should we be worried? Maybe….

How Are ETFs a Bubble Exactly?

Thanks mainly to the followers of this blog and my totally original idea of ETF investing, ETFs and passively managed index funds are exploding in popularity. People are recognizing the value of low cost, diversified investing. Even mutual funds can’t keep up with passively managed index funds.

So what’s the problem? Essentially Burry is saying that investment decisions are no longer based on the underlying stock fundamentals, but rather on their position within an index. In other words, your ETF picks stocks because of their size in the market, not because the business are necessarily profitable. (For clarification, they are picked based on their market cap, not price. Market cap being the value if you multiply the number of outstanding shares by their share price)

To Burry’s credit the situation he’s describing does somewhat resemble the CDOs in 2008. Everyone was buying these CDOs without realizing their contents were utter garbage. Today the garbage is businesses, rather than mortgages in 2008.

Is he right? Sort of, first lets consider the implications if he’s right:

Continue reading »

May 132019
 



Step 1 – Open Account

Ready to buy ETFs? Great! First you’ll need a brokerage account. I recommend Questrade. Any brokerage will do but a low cost online brokerage is going to be the easiest and cheapest for most people. Go ahead and open that account now and come back when you’re done.

Step 2 – Fund Account

Your account is open now? Good. Time to deposit some money, or transfer your account from another financial institution. Did you know that you can have multiple TFSAs and RRSPs? As long as you don’t go over your total contribution limit between all your accounts you’re good. If you’re transferring your registered account (i.e. TFSA, RRSP, RESP etc.) make sure you first contact your NEW brokerage(like Questrade). They will send a form to your old brokerage to transfer your funds.

DO NOT withdraw money from your RRSP to your bank account and redeposit it. If you do you’ll pay taxes and early withdrawal fees. If you withdraw money from your TFSA you’ll have to wait till next year to get that contribution room back (i.e. maxed out TFSA, withdraw $50k on January 2nd 2019, you can’t redeposit that till January 1st 2020 and it just sits). Not as bad as the RRSP fees and taxes but still a problem for you money bags with your maxed out TFSAs.

Does your account have money yet? No? Don’t worry it takes a few days for a deposit and a few weeks for a transfer. Come back when you’re ready.

Step 3 – Invest

Ok your account is finally funded! You’re ready to buy! But wow this interface is a lot more confusing than you thought….

Continue reading »

Mar 212017
 

I’ve been getting a lot of similar questions lately. What are bonds? Why should I care? Why are you wasting your time on this silly moose website?

I’ll answer some of those questions. Turn on the thinking part of your brain…. now… and here we go with bonds!

Not that kind of bond

Not that kind of bond

What is a bond?

A debt issued to some entity where YOU act as the issuer and collect interest. (You loan money and they eventually give it back plus some extra)

 

Wait what?

You give the government or a corporation some money, say $1000, and they promise to pay you interest, say 6%, over a specified time frame, say two years. At the end of the two years you’ll get your $1000 back plus $60 interest for a total of $1060.

Bonds are issued by governments and corporations to gain access to cold hard cash for various long term projects like World War II. Corporations prefer bonds over direct bank loans because bonds offer more flexibility. Banks are strict on what you spend their money on and won’t give you anything more till you pay back the first loan.

Governments typically don’t take loans from banks and thus will normally issue bonds to raise cash or cover a deficit. Alternatively the government can just print more money but that’ll weaken the currency on the open market and thus weaken the country.

 

How is this different from a GIC? Also, what’s a GIC?

A Guaranteed Investment Certificate(GIC) is an investment sold by a bank that provides a guaranteed return over a specified time frame.

GICs are normally issued by banks, not corporations or governments, and as the name implies is guaranteed. The word guarantee is a strong statement, but these banks have been pretty reliable these past few centuries. Bond values can change over time(more on that later) and thus their value is not guaranteed. A bond can also be SOLD at any time whereas a GIC is completely locked up for its duration.

 

Why should I buy bonds?

You’ve probably heard that people need 30% bonds and 70% stocks. There are reasons for that:

  1. Diversification – During wild market fluctuations bonds will normally do the opposite of stocks and owning both will make your portfolio less volatile. Some bond funds during the 2008 crash gained 11% while stocks fell 20%
  2. Stability – Bond prices may rise and fall slightly but they are seriously more stable than stocks. Check out the graph below.
  3. Income – Cash payouts from bonds remain fairly constant even if the bond price dances all over the place. Most bonds payout twice a year and can be used as a reliable source of passive retirement income.

Stocks vs Bonds

Stocks in Red vs Bonds in Blue. Bonds are low risk low reward which is a good thing

Ok I’m convinced, how do I buy bonds?

The easiest way to buy individual bonds is through your brokerage. Questrade offers zero commissions on bond trades. You will normally call the bond department of the brokerage to place an order. Government bonds can be purchased through the Government of Canada website. They’ll even mail you a fancy bond certificate! (Update: Canada Savings Bonds are being discontinued in November 2017. Dangit)

 

How else do I buy bonds?

ETFs – You guessed it, bonds also come in ETFs! With a bond ETF you can buy a small fraction of 1000 different bonds at once rather than a single bond. You can buy them just like a stock through your brokerage and can easily target a bond market, like government or corporate.

Vanguard’s Canadian Aggregate Bond ETF holds 770 different bonds, mostly government, it has an annual dividend (or distribution as they call it with bonds) of 3.3% which is paid monthly.

 

What else should I know?

  • Relationship between bonds and interest rates – Maybe you’ve heard that such a relationship exists. Well it does. And to put it simply, if the government reduces interest rates, bond prices go up, and vice versa. It’s an INVERSE relationship and one of the main reasons bond prices fluctuate.
  • Relationship between bonds and stocks – You should know this already, typically bonds will fall (slightly) when stocks rise and vice versa. Another INVERSE relationship.
  • Bond strategy – Infiltrate the Russian compound and steal the intel without alerting the guards…. wait…. wrong Bond again.
  • Bond strategy – Bonds are your safety net. A conservative profile will be mostly bonds. If you’re under 30 you should hold about 15% in bonds, gradually increasing that to at least 60% at the start of retirement. Thus if the market crashes you’ll at least retain some of your capital within the bonds.

 

Why would interest rates matter?

It will make sense with an example. Let’s say you buy a bond at $1000 paying 5%. You will eventually get back a total of $1050. But the next day interest rates rise to 10%. You decide to sell your first bond and buy a new one that gives 10%. Unfortunately you can’t find a chump to buy your sissy 5% bond when they can just as easily walk across the street and get 10%. The only solution is to lower your selling price to artificially give a 10% return.

You manage to sell your $1000 bond for $954.55. Had you kept it you would have earned $50, but the new owner will earn $95.45 ($50 plus your discount of $45.45) which is 10% of $954.55. Summarized below:

5% interest 10% interest (new owner) Difference
Value at purchase $1000 $954.55  -$45.45
Value at maturity $1050 $1050
Total interest $50 $95.45 +$45.45

 

Whoever issued the bond pays the exact same no matter who owns it. But as you can see the $45 was transferred between owners because of the interest rate change.

There! You’re now smarter! You can smugly talk about interest rates affecting your investments!

 

Oct 042015
 

Sell your losing positions

Thanks for reading!

Oh I should elaborate a little.

Mistake #1 – Assuming market trends continue indefinitely

Last year I bought into ZUH (BMO Equal Weight U.S. Health Care). I was attracted by the massive gains over the past 3 years…surely they would continue indefinitely? right? right??? (Mistake #1 – assuming the current trend will last forever) But even if the gains relaxed, the aging baby boomer population will surely continue to savage devour healthcare services? Considering these points was enough for me to scoop up some shares.

As you may or may not know the health care index recently got taken out back and savagely tenderized. No doubt helped in part by Mr “lets raise the price of this life saving drug by 5000%“. Naturally my first thought was “If only I had sold at the top I would have made sweet sweet bank!”. Alas if only I could predict the future! Marty Mcfly arrives from 1984 in a couple weeks, maybe he can help.

Continue reading »

Sep 202015
 

So you own a few ETFs and you’re ready to optimize your accounts. Especially you rich chumps and chumpettes with taxable accounts! Well swap ETFs are a crazy scheme with the primary benefit being tax savings. I mean, what’s with these governments! How dare they use our hard earned money to pay for roads, schools, and fundamental basic services! Even the so called “Tax Free Savings Account” is subject to some foreign withholding taxes.

Never fear, your crazy uncle has a scheme for those taxes!

 


Get to the point! What’s a swap ETF?

Well let me break it down for you wizards. A swap ETF essentially turns dividends or interest income into capital gains. Why would you want that? Because foreign dividends and interest are taxed at your full income tax rate, meanwhile capital gains are only half that. If you make over $138,586 your federal tax rates will be like so: Continue reading »