May 052016

The Pessimism in the Markets

Corporate profits have been disappointing lately. Apple (AAPL) recently said its revenue fell for the first time in 13 years due to a decline in iPhone sales compared to the same time last year. Apple shares are worth 26% less now than a year ago. Investors are warned the decline could continue. 🙁 Other publicly traded companies are experiencing similar challenges. Top line growth is slowing down, and its becoming harder to maintain profitability levels.

A recent article on suggests that future investment returns for millennials will be lower than prior years. It cites a study by consulting firm, McKinsey & Co, which proposes that “the forces that have driven exceptional investment returns over the past 30 years are weakening, and even reversing.” So maybe it’s time for investors to lower our expectations.

Lower Investment Returns for Millennials

The last 30 years was actually a bit of an anomaly because on average we’ve had a couple of percentage points better annual returns when compared to the past 100 years in general. Falling inflation rate has helped drive real returns, and bond prices increased substantially as interest rates fell for the last couple of decades. 🙂 But going forward we may face secular stagnation and a lack of economic growth due to an older population. Let’s take a look at the study’s findings, and future return estimates.


Regarding U.S. equities for the time being, it appears growth in the following 20 years will be 1.4% to 3.9% lower than in the past 30 years. The director of the study, Richard Dobbs, warns that the people who will lose out the most are the millennials. Oh no. That’s me! It appears we’ll have to either work longer or find other ways to put more money in our retirement accounts. The alternative is to retire poorer and live off government cheese, which is actually a luxury in Canada considering the expensive tariffs we have on dairy products, haha. 😀

Preparing for the Next 20 Years

So here are a few of things I’m doing to deal with all this information. They may not work for you, but I will share anyway.

First, the most important thing is to lower the cost of investing. This is even more crucial if market returns will underperform in the future. Using the numbers from the graph above, the average return on U.S. equities over the last 30 years was 7.9%. So if our management fee and other combined costs were 1%, then our actual return would be 6.9% after fees. The 1% fee would effectively eat away 13% of our actual market return.

But the “slow-growth scenario” claims that over the next 20 year period the annual return of U.S. equities will be only 4%. If we still pay the same 1% portfolio fee as before, then this cost will eat away 25% of our future annual return, nearly twice as high in percentage proportion to a 7.9% market return. Bummer. 🙁

So how can we lower pesky fees and reduce the overall cost of investing? It’s simple. 🙂

How do we reduce the long term costs of plumbing? We learn some basic DIY plumbing skills. How do we reduce the cost of food? We learn to cook and meal plan. How do we reduce the cost of car repairs? We learn some basic knowledge about car maintenance like how to check the tire pressure, change the oil and air filter, etc. We can reduce the cost of any aspect of our lives by simply educating ourselves on the subject. 😉


So if we want to lower our investment fees, we just have to better understand how to invest and manage our own money. With the advent of ETFs and robo-advisors, I hope everyone reading this blog is paying less than 1% management fee on their portfolio. If you’re interested to learn more about low cost wealth management services, check out the thorough review about Wealthfront, that my friend Jacob wrote on his blog.

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Feb 142012

My bank’s checking account has a $3.95 monthly fee. However this fee is dropped if I have at least $1,500 in that account for the entire month. Typical right? Just about every bank does this. Keep a minimum balance in your account, and the account fee is waived! I used to maintain the minimum balance to avoid paying fees. But I wasn’t too happy about it because I was essentially lending the bank my money, interest free.

But recently I have removed the minimum balance out of my account and started to actually pay $3.95 every month. But why would I choose to pay more fees when I don’t have to?  Answer: *Opportunity Cost (^_^)
It’s true that by keeping a minimum balance of $1,500, I save $47.40 a year on checking account fees. But if I can make more than $47.40 a year by investing $1,500 then I would be better off investing that money instead of keeping it tied up in the bank right? So that’s why I transferred the money from my checking account into my brokerage account, and used all that money to buy my bank’s own common shares.  In other words, I purchased $1,500 worth of TD Bank stocks. That’s because the stock’s dividend was more than enough to cover my checking account fees. Even today, according to google finance, TD Bank currently has a dividend yield of 3.46%. This means if you invest $1,500 into TD shares today, TD will pay you $51.90 every year in dividends. If you live in BC and make between $43K and $74K of income per year like me, then you will only have to pay a *few dollars of tax on that amount and pocket $48.38. Not too shabby (^o^)
To review, I am now paying the bank $47.40 in fees every year. Meanwhile the bank pays me $48.38 (after tax) for being a shareholder. Basically this means I get to use the bank’s chequing account service for free, AND make a tiny profit to boot. But it gets better! TD has grown it’s dividends 11 times in the last 12 years ( ゚д゚)So this year I may receive $48.38 like we’ve calculated, but next year, I wouldn’t be surprised if TD pays me $50 or more because those dividends keep going up. But it gets even better! The *payout ratio for TD is under 50%!  This strategy also protects me from higher banking fees in the future because once I became a shareholder, every dollar of profit the bank makes from charging their customers higher fees will only add value to my stocks.


Of course not everyone banks with TD. But this strategy is transferable. Here’s some basic information on a few other banks below.

BMO Practical Plan Chq Acct: Fee = $4.00/month. Waived with $1,000. BMO’s stock dividend yields 4.80% 
CIBC Everday Chq Acct: Fee = $3.90/month. Waived with $1,000. CIBC yields 4.69%
Scotiabank Powerchequing Acct: Fee = $3.95/month. Waived with $1,000. Bank of Nova Scotia yields 3.96%

But I can see why this may not be a good idea for some people. This strategy does come with risks after all. You risk the banks cutting their dividends in the future, even though they all have a solid history of growing them. You also risk losing some of your initial investment if their share prices drop and never recover, even though banks are the oldest and largest companies in Canada and the backbone to our whole economy. For short term investors and those who want to play it safe, keep your balance in the bank to save yourself some money. But if you want to live on the edge like me, then don’t let your bank hold your money to only benefit their own interests. Buy a piece of your bank instead and profit with them, and by the time you retire maybe you’ll be a little wealthier than if you hadn’t. (^_~)

*Opportunity Cost – Losing the opportunity to profit from a choice, because another choice was taken. Go ask an economist for a better explanation (>_<)
*few dollars of taxThe dividend tax credit makes dividend income very tax friendly. Depending on your location and other income, you may not have to pay any taxes on dividends at all.
*payout ratioTo be explained in a future post.

Aug 312011

I’ve mentioned in an earlier post that most of the big 5 banks in Canada are raising banking fees this year. But there is a silver lining. See if you can follow along with this plan.

The minimum balance required to wave the $3.95 monthly fee on my TD bank account used to be $1000. So for that reason I’ve always held at least the minimum in my account before. I basically save $47.40 a year. In other words, if I could make more than $47.40 a year (after tax) with that $1000 (or 4.74%), then I would be better off investing that money in the financial markets and just pay the monthly service fee.

However, starting this month, the minimum requirement to waive the fee has gone up to $1500, but the fee itself remains unchanged at $3.95/month. I now have $500 more capital at my disposal if I choose to invest it. $47.40 from $1500 means I only need to make a 3.16% total return (after tax) in order to cover my bank account fees. Making 3.16% per year for the foreseeable future sounds a lot more doable than 4.74%. So from now on I’ll put the $1500 (that would’ve been tied up in my checking account) into buying common shares of TD Bank, and just pay the $3.95 monthly fee. Here’s why.

TD shares currently pay a healthy dividend of 3.50%, at less than 50% payout ratio (very safe,) which means the dividend alone paid to me, even after tax, which ends up being about 3.3%, is enough to cover the 3.16% return I need, to break even. Not to mention the future potential for dividend growth and capital appreciation. Plus, many people who kept $1000 in their accounts before to avoid the monthly fee will just top-off to $1500 starting now, which will give TD more capital to grow its business boosting value for its shareholders (me.)

In the end, this method is a little risky but if the banks are going to grow and make money at the expense of their customers, then it’s like that saying if you can’t beat them, join them. Of course only time will tell how this will play out. Don’t try anything on this blog without consulting with a financial advisor first.

Jul 072011

Here in Canada, major retail banks are increasing service fees. This means we might have to pay a little more for the same everyday banking services. I heard ScotiaBank has already done it, CIBC also increased their fees in April, and I got a letter from TD earlier this year that states they will start charging higher fees starting August this year.

For TD, whom I bank with, some changes include raising the fee for additional transactions from $0.65 to $1.00, and increasing the service fee of one of their checking account from $8.95 to $10.95 a month. Food, energy, rent, gas, clothing, insurance, property tax, and just about everything else is becoming more expensive in Canada, so I guess it only makes sense to also pay more for bank services. Yup, inflation can be a large PITA sometimes. From what I’ve heard, so far 3 out of the 5 major banks in this country are raising fees this year, which they haven’t done for many years now, so maybe the other 2 banks are soon to follow?

To avoid getting charged these higher fees, one option is to look at alternative banking solutions like online banks instead of the big 5. For example PC Financial has a free checking account, uses CIBC bank machines, and has CDIC protection backed by the government. ING Direct has their THRiVE checking account which is also free. There is another way you can save money from these banking fee hikes. It is quite long to explain so I will talk about that in another post.