Jan 232017
 

Beating the market isn’t necessarily hard. We don’t have to outperform everyone else. We just have to do better than the average. By picking individual stocks my investment returns have either matched or beaten the S&P/TSX Composite index every year since I started investing. 😀 But in today’s post I will explain why that doesn’t actually matter.

When Using Debt to Invest Pays Off

Most readers can recall that my Saskatchewan farmland value has been growing at incredible rates year after year. I’ve disclosed my stock performance many times in the past. And owning real estate in Metro Vancouver for the past 8 years has also helped to boost my net worth. However, beating the market is easy when leverage is used during a bull market cycle. Borrowing money to invest will always increase one’s investment gains, as long as the investment returns are higher than the cost to borrow, which luckily has been the case for me since I began investing. 😉

But what kind of returns would I be getting if I hadn’t used any financial leverage? Since I no longer hold any leveraged accounts at TD, there is no margin to exaggerate this account’s performance. 🙂 I have not been meticulously keeping track of my portfolio’s internal rate of return (IRR.) However, we can use the next best thing, which is a performance chart from TD.

Here’s a look at my non-leveraged portfolio for the past 3 years. It appears that my annual return was 11.57%. 🙂

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Sep 222016
 

Lower Cost with Interactive Brokers

Everyone likes a discount, especially personal finance enthusiasts. We tend to get hyped over even marginal deals. 😀

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Speaking of margin-al discounts. I recently lowered my stock margin rate from 4.45% to just 1.95%. Hot damn! It’s even lower than my mortgage now, haha. 😁

One of the best things investors can do to increase our net returns is to reduce the cost of investing. When it comes to leverage, or borrowing money to invest, the best way to reduce our cost is to find a broker which charges the lowest interest rates. 🙂

In the past I have held my margin account with TD Direct Investing. The current interest rate they offer is 4.25% or 4.75% per year, depending on which currency investors borrow in.

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Although TD’s rates are already competitive relative to the other large banks in Canada, it is not the lowest. After doing some research online I’ve discovered that a U.S. based brokerage firm called Interactive Brokers offers the lowest margin rates, and has cheap trading commissions. So I recently transferred my entire margin portfolio from TD to IB to reap the benefits of lower cost borrowing. 🙂

Interactive Brokers Advantages

Here are 4 reasons why I switched to IB.

  1. Reduced margin rates for more cost-effective leverage. I currently have about $54,000 of margin debt. I was paying on average 4.45% a year for this massive loan with TD. But with Interactive Brokers I’m now paying only 1.95% on average because I have both US and Canadian dollars. This represents a difference of 2.50% between the two brokers, which translates into $1,350 of interest rate savings every year! 😀 “BM” in the table below refers to the benchmark rate set by Central Banks.16-09-interactive-brokers-margin-rates
  2. Cheaper trading commissions. TD and many other brokers charge a flat fee of $9.99 per trade when buying stocks. But IB charges 0.5 cent per share for U.S. accounts, and 1 cent per share for Canadian stocks. The minimum cost per transaction is $1. For example if I buy 200 Shares of BMO (Bank of Montreal) shares, then my total commission would be $2.00 CDN. My trades are typically worth between $1,000 to $3,000. This means I rarely buy more than a few hundred shares of anything because most companies I prefer to own are dividend growth stocks, which tends to be priced at $20 per share or higher.
  3. Access to global markets. This isn’t a big deal for most people, but for more advanced investors Interactive Brokers allows trading in foreign currencies outside of North America. This means we can buy European stocks in Euros, or Australian stocks directly from the ASX using Aussie money. 🙂 TD used to have a platform that lets Canadians like myself trade internationally, but they cancelled that service last year. 🙁 I’ve mentioned in a previous post, that I want to diversify into other countries and there could be some good opportunities in the U.K. after the Brexit event earlier this year. So having access to a global trading platform is important for my financial goals. 😉
  4. Great for options trading. $0.70 per contract; $1 minimum order; volume discount available. And in the unlikely chance that our open options are exercised or assigned, there is $0 assignment fee, unlike $43 for TD or BMO.

Disadvantages of IB

Here are a couple drawbacks with IB.

  1. Penalty for not being an active trader. If investors do not spend at least $10 in commissions per month, we will be charged the difference. Furthermore, there’s a $10 fee for real-time quotes each month which is waived if at least $30 in commissions is spent. I typically trade once or twice a month so I will be paying these fees.
  2. $10,000 USD minimum balance to open up an account. This isn’t an issue for me, but some investors might have trouble coming up with $10K.

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Aug 152016
 

Asset Allocation for the Wealthy

I don’t always recognize good investment opportunities when I see them. But I do know that we should never invest in funerals… because it’s a dying industry. But when I run out of investment ideas I usually turn to the wealthy.

I think it’s extremely important to follow what rich people do. It gives us insight about financial opportunities that we should be aware of. People with extremely high net worths tend to have either a natural knack for managing money, or are at least smart enough to hire the best advisors to invest on their behalf. Of course wealthy people don’t make the best investment decisions all the time, but their historical performance is consistently higher than the average Joe, which is how the rich continues to stay rich. 🙂

One way to track the “smart money” is to follow the quarterly member surveys from Tiger 21, an exclusive network of high net worth investors. To get into this private club all you need is to have a minimum net worth of $10 million. Easy right? 😛 This confidential and anonymous survey asks members about where they have their net worths allocated.

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Almost all participants are either self made investors or entrepreneurs with a good eye for business trends. With hundreds of members spread across North America, the results of the survey should represent a fairly accurate cross section of investment opinions from some of the most sophisticated millionaires and billionaires in the world. So what have the wealthy been doing during the last year? For the most part they have decreased their exposure to real estate and increased investments in private businesses. 🙂

Below we can compare the Tiger 21 survey results from the first quarter of last year with the same quarter this year.

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Mar 172016
 

Start Compounding As Early As Possible

I recently came across a retirement guide made by J.P. Morgan Asset Management. It includes a nifty comparison between those who starts investing earlier vs later. The results show how time can play a significant part when it comes to compound returns. 🙂

JPMorgan shows outcomes for 4 hypothetical investors who each invests $10,000 a year at a 6.5% annual rate of return over different periods of their lives:

  • Chloe invests for her entire career of 40 years, from age 25 to 65.
  • Lyla starts 10 years later, investing 30 years from 35 to 65.
  • Quincy starts to invest early but stops after 10 years, contributing from 25 to 35.
  • Noah saves for 40 years like Chloe from 25 to 65, but instead of being moderately aggressive he simply holds cash, term deposits, GICs or CDs, etc and receives a 2.25% average annual return.

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Let’s break down the results.

  • Chloe begins investing early, plus she’s consistent, which is why she has nearly $1.9 million at retirement. 😀
  • Even though Lyla started just 10 years later than Chloe, she only ends up with $920K, which means postponing investing for just 10 years while we’re young will cost us almost a million dollars once we’re old.
  • Quincy, who invests for only 10 years, still ends up with $951K at retirement, which is surprisingly more than Lyla’s portfolio, even though Lyla spends 30 years investing.
  • Finally Noah, who has a lower risk tolerance than the others, ends up with only $652K at retirement even though he contributed for 40 years.

Of course no one can guarantee a 6.5% annual return. The chart is for illustrative purposes only and does not represent a real life investment plan. It simply demonstrates how annual rates of return and the passage of time can effect the outcome of a retirement portfolio. The earlier we start investing, the better. 🙂 But just for fun, here’s a look at how the following asset classes performed over the past 10 years.

  • Canadian Equities – 3% annual return
  • U.S. Equities – 6%
  • Fixed Income – 5%
  • Canadian Real Estate – 12%
  • U.S Real Estate – 3%
  • Gold – 9%
  • Farmland – 12%

Depending on our asset allocation it’s possible to have made 6.5% annual returns with a moderately aggressive portfolio over the past 10 years.

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Oct 262015
 

What a Liberal Government Means for Canadian Investors ?

Last week the charismatic Justin Trudeau lead the Liberals to win the 2015 federal election. I’m sure his good looks has nothing to do his popularity and success. 😛

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Justin pledged to make meaningful policy changes to the country that could benefit millions. But will his commitments help you? The jury is still out on the long-term effects, but here’s a TL;DR summary of what Trudeau’s government means for Canadian personal finance and investors in the short term.

The new Liberal majority government will…
HelpHinder
  • spenders
  • low-income seniors
  • stock market investors
  • students
  • most middle-class workers
  • savers
  • high-income households
  • single-income nuclear families

These are only generalizations. The rest of this post will explain individual policies that could affect your pocket book. Keep in mind that just because politicians promised something during their campaign, it doesn’t mean they will always follow through. Any of these policy changes below could be altered or cut completely going forward.

Borrowing To Invest. ? Going back into Deficit. 

According to the federal finance department, Canada’s government had a $1.9 billion surplus in the 2014-2015 fiscal year. 🙂 But the new Liberal government under Trudeau plans to run a $10 billion deficit for each of the next 3 years, before balancing the budget again in 2019.

Going into more debt as a way to expand economic output isn’t necessarily a bad idea. $10 billion is peanuts relative to our $1,827 billion/year economy (0.6%.) Also, our national debt to GDP ratio is quite low by international standards, which means we can borrow money at ridiculously low costs. New 10 year Canadian government bonds are currently yielding 1.5% in annual interest.

After factoring in inflation, there might actually be no real cost to tax-payers, lol. 🙂 Craig Alexander, the Vice President at the C.D. Howe Institute, said that despite digging deeper into debt, the debt to GDP ratio of Canada is still going to decrease over the next three years because our GDP is expected to increase as well. 😀

About a third of the new spending will go towards much-needed public transportation and infrastructure development and repairs. This means building more roads, highways, bridges, etc. This should improve the country’s productivity because gridlock and urban densification are causing major problems right now in large cities such as Toronto, Montreal, and parts of Vancouver. The other two-third of public spending is planned for social housing, seniors centers, and clean energy projects like solar and wind farms.

Due to more deficits and fiscal stimulus the Bank of Canada will be less likely to further cut interest rates for the time being.

What this means for you: Invest your money. Historically the S&P/TSX Composite performed well during times of deficit spending. Below is a graph I put together using stock market returns and government budget information courtesy of the CBC. During the two decades from 1995 to 2014 there have been 9 years where the government ran a deficit budget. And the stock market had positive returns in 8 out of those 9 years.

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Economic stimulus increases employment and grows the economy so people and businesses feel more optimistic about their investments which tend to be bullish for the financial markets. 🙂 In particular I would consider investing in stocks or sectors that have exposure to financials, cannabis, industrial goods, construction, utilities, preferred shares, and green technology (solar panels, wind, etc.)

Goodbye annual $10,000 TFSA contribution limit ?

The Tax-Free Savings Account annual contribution limit will revert back to $5,500 and increase in $500 increments based on inflation. This will make it harder for Canadians to save and won’t benefit the middle class. There’s a rumor that the TFSA only helps the rich get richer. But that’s baloney! The TFSA actually helps anyone who wants to save get richer. Here’s a table courtesy of the National Post which shows that many low and middle-income families still managed to max out their TFSA contribution rooms in 2013 when the limit was still $5,500.

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