Feb 062017
 

Index investing is a great way to build long term wealth. It’s simple to implement, convenient, and you are guaranteed to make the same returns as the market, minus any fees. But is it right for everyone?

Taking a closer look at Index Investing

How Indexes Are Managed

There’s a common theory that retail investors shouldn’t try to beat the market since it’s almost impossible to do over time. But I’m not sure this is true. The “index” isn’t the holy grail of stock selection. Some folks from the S&P Index Committee sit in a room and decide which stocks to include in their index based on a set of criteria with arbitrary measurements. It would be preferable if prominent investors such as Ray Dalio or Warren Buffett were on this committee, but they aren’t. Lol.

The S&P/TSX Composite index is made up of 250 stocks, chosen by the committee. It’s intriguing how only 250 stocks are selected out of the possible 1500+ on the entire Canadian stock market. The methodology for selecting stocks to be included in an index contains guidelines for minimum weight in the market, price per share, market cap, and sufficient liquidity requirements. The index is reviewed quarterly and all Index Securities that, in the opinion of the Index Committee, do not meet certain requirements are removed. And for the S&P 500 stock market index in the United States, anywhere from 25 to 50 changes are made every year. It’s basically a handful of people getting paid to actively manage a list of stocks that they believe represents the overall equity market.

The Paradox of Index Investing

From what I’ve heard, the whole idea of index investing is to match the market’s performance using a passive methodology. But if picking individual stocks will underperform the market most of the time, according to the mainstream, then how can index investing work if it’s based on a managed list of stocks that is updated every quarter based on the decisions of some individuals on Wall Street? Why are they more qualified to pick stocks for the index than let’s say, personal finance bloggers? 😀

I don’t think it would be hard for a handful of competent value and dividend investors to get together, create their own list of 250 stocks, and then beat the S&P/TSX Composite index. Last year Nelson from Financial Uproar hosted a stock picking contest for personal finance bloggers. There were 14 participants, including myself. Our average investment return for 2016 was 30%. We beat all the major indexes in both Canada and the U.S. Since an index is meant to represent the average of the stock market, then all we had to do to beat the market was to just be better than average. 😉 Easy peasy.

Continue reading »

Jan 122017
 

What’s 6 inches long and gets Kim Kardashian excited? That’s right. It’s money. 😀 Especially the one with Benjamin’s face on it. There is certainly no shortage of liquidity in the world today thanks to central banks. As investors, our priority is to increase our expected returns while reducing our anticipated risks. A good way to go about doing this is by setting goals. Making smart decisions and taking appropriate action is easier if we have defined a target to aspire to. 🙂 If we don’t take control of our money, then someone else will inevitably try to use money to control us.

Here are my financial goals for 2017.

  • Grow my TFSA to $80,000.
    I currently hold $72,000 across all my tax free savings accounts. I have $3,000 contribution room remaining for the year. All the investments inside my TFSAs have performed well, except Bombardier stocks BBD.B. Overall I’ve been quite lucky with my stock picks. 🙂
  • Grow my RRSP to $100,000.
    I currently hold $86,000 in my RRSP. I have $10,000 contribution room remaining for 2017.
  • Grow my net worth to $750,000.
    I hope to grow my wealth by $180,000 this year. $60,000 of this increase could come from savings and debt reduction. The remaining $120,000 would ideally come from investment returns. 🙂 This isn’t an unreasonable expectation considering last year’s market performance, and I currently have over $1 million worth of assets.
  • Increase my passive income rate by $2,000/year.
    I plan to invest at least $35,000 into a mix of fixed income securities and dividend stocks. The average yield on new investments would be 4% to create $1,400 of new passive income per year. The remaining $600 growth should come from dividend increases from investments that I already have in my current portfolio.

That’s pretty much it. As usual, the likelihood for me to reach my goals will depend on many factors, including how the financial markets perform which is largely out of my control. We’ve had a great Q4 in 2016 to finish the year on a high note. But who knows how this year will turn out. Setting goals is important because it gives us something to focus on and look forward to. It guides our behavior so we feel a sense of purpose when making financial decisions. 🙂

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Random Useless Fact:

There’s a man in east India who has 39 wives, 94 children, and 33 grandchildren so far. They all live in a 100 room mansion. It takes 30 whole chickens, 132lb of potatoes, and 200lb of rice just to make a family dinner.

 

Jan 052017
 

Narrowing Down the Choices

Most bond ETFs have pulled back meaningfully over the last few months. Now is probably a good time to consider buying some bonds in your TFSA. There are over 60 bond ETFs on the TSX to choose from. So which is the best one? Rob Carrick wrote an article about bond ETFs for the Globe & Mail back in 2011. I’ve narrowed the list down to the following 5 exchange traded funds which I think are the most appropriate for Canadian retail investors!

  1. Vanguard Canadian Aggregate Bond Index ETF (VAB)
    A favorite fund among couch potato investors. The default go-to bond ETF. Portfolio manager Justin Bender recommends it in his model ETF portfolio.
  2. Vanguard Canadian Short-Term Bond Index ETF (VSB)
    This is similar to VAB, but contains shorter maturing bonds. Very safe and steady. Popular with conservative index investors.
  3. iShares Canadian Universe Bond Index ETF (XBB)
    This one has been around for a long time. It’s the largest bond ETF here by net asset value. Great track record overall.
  4. iShares Canadian Corporate Bond Index ETF (XCB)
    Holds corporate bonds only. Withstood the great recession very well. Relatively high management fees though.
  5. BMO Mid Corporate Bond Index ETF (ZCM)
    Similar to XCB, but more diversified and lower fees.

Honorable mentions: Horizons Active Corp (HAB), iShares Canadian HYBrid Corp (XHB), TD e-Series Bond Mutual Fund (TDB909)

Maybe there’s a bond fund I didn’t include above that is a better fit for you. Check out Rob’s article to see a more complete list of funds. The following table breaks down the five bond ETFs into categories so we can compare them. 🙂 You can read my previous post about what bonds are if you need a refresher. (Bond table below)

Breakdown of the Top Five Bond ETFs

Comparing Bond ETFsVABVSBXBBXCBZCM
Price per unit as of Jan 2016$25$24$31$21$16
Government / Corporate mix %77 / 2371 / 2969 / 310 / 1000 / 100
Net Assets$1.1 billion$0.8 billion$2.1 billion$1.7 billion$1.2 billion
MER (annual fees)0.13%0.11%0.34%0.45%0.34%
Average duration7.6 years2.7 years7.4 years6.1 years6.2 years
Annual yield2.75%2.45%2.80%3.19%3.18%
Avg yield to maturity2.0%1.2%2.1%2.7%2.8%
% Credit rating AAA45%57%41%4%0%
% Credit rating AA37%23%27%26%22%
% Credit rating A9%11%21%33%26%
% Credit rating BBB8%10%11%38%52%
1 year total return1.2%1.3%1.3%3.2%3.6%
5 year average annual return3.0%1.9%2.9%3.7%4.8%
Morningstar ETF Rating4 stars4 stars4 stars5 stars5 stars
Sector breakdownGov’t 77%
Financial 12%
Industrial 8%
Utilities 1%
Gov’t 71%
Financial 19%
Industrial 8%
Utilities 1%
Gov’t 69%
Financial 12%
Infrastructure 4%
Energy 5%
Industrial 2%
Utilities 1%
Others 8%
Financial 42%
Energy 18%
Infrastructure 16%
Communication 10%
Industrial 7%
Real Estate 6%
Energy 28%
Financial 25%
Communication 15%
Real Estate 13%
Industrial 10%
Infrastructure 9%

 

 

How to Decide Which Bond ETF to Buy

Let’s go down the list of categories one at a time, starting with the government/corporate bond mix. Government bonds in Canada are considered very safe investments. Low risk means low reward. The current yield on a 10 year Canadian bond is only 1.7%, which leaves much to be desired.

However, a 10 year corporate bond can go for roughly twice that yield, reaching between 3.0% to 3.6% return. Here are a couple of corporate bonds I’ve found using my broker’s online web interface – Brookfield Asset Management and Bell Canada bonds. 🙂

As we can see, Brookfield and Bell Canada have investment-grade credit ratings of A- and BBB+ respectively. Both companies are very financially sound, and are well known among stock investors as blue-chip, large-cap stocks (BAM.A) and (BCE).

Bell is literally the largest telecommunications company in the country, worth over $50 billion, and is a full fledged dividend aristocrat. So although there’s a chance BCE could go bankrupt in the next 10 years, the risk of that happening is really low. Government bonds are the safer variety. But after adjusting for risk, I still prefer corporate bonds like Bell that yields 3.2%, over Canadian government bonds that only pay a disappointing 1.7%. Seriously – even GICs offer higher yields than 1.7% right now. 😄

Since I’m comfortable with a 100% corporate bond portfolio, my bond ETF choice is between XCB and ZCM. This is not to say all government bonds are bad. I just think there are better alternatives at this time, given my personal risk tolerance. Continue reading »

Jan 022017
 

The Second Longest Bull Market

Happy New Year! 🙂 I hope everyone had a great 2016. It’s somewhat surreal to see an economy that’s still struggling while the stock market has never been stronger. We are currently living in the 2nd longest bull market in American history, recently surpassing the 7 year streak that spanned 1949 to 1956.

2017 could be the year that we finally see a major market correction. But who knows? Maybe stocks will remain resilient and continue to climb for several more years! After all, the longest bull market ever lasted 13 years from 1987 to 2000.

Chart from http://money.cnn.com/

My goal of reaching freedom 35 means I need to be financially independent by 2022. That’s only 5 years from now! Can the markets continue to move higher until then? Well the 13 year bull market run from 1987 to 2000 shows that it’s indeed possible. 🙂 Like many other millennials, I began investing in 2009 by sheer luck, because that was the perfect time to get into the stock market. Maybe I can deleverage at the right time too, Haha. 😀

Future apoplectic haters will probably say, “Well of course he retired early. Any ninny with half a brain could have borrowed $500,000 to buy stocks and other financial assets between 2009 to 2022 and easily become a millionaire.”

And they would be correct. 🙂 But my question is why haven’t I heard of anyone else borrow $500,000 to invest right now? This is currently the best time of our generation to use leverage to potentially double or even triple our investment gains! Surely I can’t be the only one to see the advantage of borrowing money at 2% to buy and hold strong, reliable, blue-chip stocks like utilities and Canadian banks that have been paying 4% or higher dividends for decades, and are also expected to appreciate in value over the next 5 years. Call me crazy, but I want to get rich sooner rather than later, even if it means taking on a bit more risk. 😀

Anyway, December has been another amazing month for the markets. All stock indexes gained, including my new British equities purchased recently. It’s still very early to tell so I’ll continue to hold my U.K. index ETF, and see how it does over the next year or so.

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $700
  • Freelance = $900
  • Dividends = $700
  • Interest = $400
*Discretionary Spending:
  • Fun = $300
  • Debt Interest = $1200

*Net Worth: (MoM)16-12-networthiq_chart-nov

  • Assets: = $1,050,000 total (+12,200)
  • Cash = $1,800 (-17,700)
  • Canadian stocks = $135,100 (+5000)
  • U.S. stocks = $83,200 (+3000)
  • U.K. stocks = $18,600 (NEW!)
  • RRSP = $75,100 (-200)
  • Mortgage Funds = $30,200 (+3500)
  • SolarShare Bonds = $10,000
  • Home = $263,000
  • Farms = $433,000
  • Debts: = $479,500 total (-2,600)
  • Mortgage = $185,500 (-500)
  • Farm Loans = $191,800 (-600)
  • Margin Loans = $59,000 (-300)
  • TD Line of Credit = $16,700  (-800)
  • CIBC Line of Credit = $9,500
  • HELOC = $17,000 (-400)

*December Total Net Worth = $570,500 (+$14,800 / +2.7%)
All numbers above are in $CDN. 

Good golly! What a way to end the year. 🙂 Thanks primarily to stock and farmland appreciation, my net worth has increased on average by over $12,000 per month in 2016. That’s totally dope! I can hardly contain my excitement! 😀 It was a gradual and steady process, but I’ve managed to somehow accumulate $350,000 of financial assets over the last 7 years. I wonder what amazing new serendipity awaits for my finances in 2017. 🙂 I guess we shall see. Good luck to everyone in the new year!

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Random Useless Fact:

Stingrays do not use their eyes to hunt for food. Their eyes are above their bodies, but their mouth and nostrils are situated on their underbellies.