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US Investors in Canada: What to Watch For

Index investors in the US have always had it easier than Canadians, thanks to lower costs and more choices. Unfortunately, if those investors move to Canada, their plight becomes much more difficult.

Unlike Canada (and virtually every other western country), the US requires its citizens to file an annual return and potentially pay taxes even if they live abroad. The rules may apply even if you were born in Canada and have never lived in the US, since it’s possible to inherit citizenship from US-born parents. For tax purposes, “US persons” don’t even need to be citizens: they can also be Canadian green card holders or snowbirds.

Tax implications for US persons living in Canada are complex and often controversial: if you’re in this situation, you should seek help from an advisor who specializes in cross-border issues. But here’s a heads-up on two issues that have recently come up with clients of our DIY Investor Service who had no idea they were flirting with danger.

Don’t open a TFSA or an RESP. Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs) offer significant tax benefits for Canadians.

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More DIY Investing Challenges

In my last post, I looked at some of the biggest challenges faced by DIY investors. I came up with the list after working with clients of PWL Capital’s DIY Investor Service. The theory behind indexing is relatively straightforward, and it’s quite easy to set up a simple portfolio. But do-it-yourselfers often face obstacles when trying to implement their plan. Here are a few more that need to be overcome if you want to be a successful DIYer.

Unrealistic expectations. Anyone who works with an advisor completes a risk tolerance questionnaire, and the process is revealing. Investors often say they want an expected return of 6% to 7% (occasionally we get people who expect 8% or more) while also indicating they’ll accept no more than a 10% loss in any given year. Those goals are incompatible.

With bond yields under 3% today, a balanced portfolio of 60% equities and 40% fixed income probably has an expected return of about 5% before fees, and in a scenario like 2008–09 it could suffer a drawdown close to 20%. Unless investors understand these trade-offs they can’t hope to carry out a long-term plan.

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Canadian Couch Potato Threatened By Legal Action

[Note: This post was an April Fool's joke!]

I regret to announce that this blog is in jeopardy of being shut down due to pending legal action.

On the afternoon of Friday, March 29, I received a letter from the law firm of Zuckercorn & Loblaw, LLP. The attorneys informed me that the name “Canadian Couch Potato” is owned by an Ontario corporation that is threatening to sue for trademark infringement. According to the letter: “You can avoid legal action by immediately ceasing and desisting from any and all infringing activity including use of the canadiancouchpotato.com domain.”

The letter gives me seven (7) days to decide on a course of action, and I am currently seeking counsel from my own attorney before determining how to proceed. Rest assured I will not give in unless I have no other choice.

You can read the full text of the cease-and-desist letter by clicking the image below.

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Couch Potato Portfolio Returns for 2012

I think we can safely say we are now almost four years into the most disrespected bull market in history, to borrow a phrase from Alexander Green. In a recent roundtable in The Wall Street Journal, the moderator opened the discussion by saying, “It’s been another very difficult year for investors.” Um, really? US stocks were up over 16% in 2012, and international equities did even better. If that’s a difficult year, I can’t wait for an easy one.

Indeed, last year was much kinder to investors than 2011, when the Complete Couch Potato returned just 2.36% and most of my other model portfolios did worse. In 2012, all of the model portfolios delivered remarkably similar performance, with returns between 8% and 9%.

The data below were gathered from fund websites whenever available: otherwise I used Morningstar. Returns for US-listed funds are expressed in Canadian dollars. Consider these unofficial results: when I have all the necessary data I will update the long-term Couch Potato performance report card. [Note: The

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ETF Webinar Today

This afternoon (Tuesday, August 14) I will be participating in a webinar called “ETFs in Portfolio Management and Construction,” moderated by Yves Rebetez of ETF Insight. I’ll be joined by two industry professionals who are much smarter and better dressed than I am: Alfred Lee, Vice President and Investment Strategist for BMO ETFs, and Tyler Mordy, Director of Research, HAHN Investment Stewards.

We’ll be discussing the various ways that ETFs can be used to build diversified portfolios. I’m going to cover the basics using the Complete Couch Potato as an example. This  portfolio provides extremely broad diversification with just six ETFs, all for an annual fee of 0.29%. The other panelists will consider some more advanced strategies, including adding alternative asset classes to traditional stock-bond portfolios.

I welcome you to join us at 4:15 pm EST. For login information and links, visit ETF Insight.

Book giveaway winners

Thanks to everyone who entered the draw for one of three copies of my new book, The MoneySense Guide to the Perfect Portfolio. There were more than 250 entries,

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What’s Next for iShares — Part 2

Here is part two of my interview with Mary Anne Wiley, Head of iShares, who explains what to expect in the wake of BlackRock’s acquisition of Claymore. You can read the first part of the interview here.

Claymore pioneered some innovative programs, such as preauthorized cash contributions (PACCs) and dividend reinvestment plans (DRIPs), as well as the Scotia iTrade partnership that brought commission-free ETFs to Canada. Will those programs continue?

MAW: Let me take each one of those individually. Claymore did have a program with PACCs, DRIPs and SWPs, and by far the DRIPs were the most popular. There are other ways to do DRIPs with the brokerages directly, but not every brokerage has every ETF set up for it, and we want it to be as easy as possible for all types of investors. So we are going to keep all of the programs on the existing funds, and we are looking to expand the DRIPs, in particular, to a wider set of iShares.

As for the commission-free partnerships, we think these are fabulous programs. Anything that encourages investors to try ETFs and get to know them,

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Why You Should Beware of First Dates

Imagine that you’re the marketing director for MegaAlpha Investments and you want to advertise two of your mutual funds. In the September 2011 issue of Performance Chaser magazine, you place the following ad:

Are stocks still worth the risk? Not anymore. Over the last three years, the S&P/TSX Composite Index delivered an annualized return of just 0.2%. Meanwhile, the MegaAlpha Awesome Income Fund earned 6.4% a year. Rather than relying on a disappearing equity premium, our managers delivered reliable yield and significant growth with a portfolio of the highest quality government and corporate bonds.

Three months later, in the December issue, you run a different ad:

Are stocks still worth the risk? You bet. Over the last three years, the MegaAlpha Awesome Equity Fund  delivered an annualized return of 12.5%, dramatically outperforming the DEX Universe Bond Index, which returned just 7.7%. Rather than relying on the perceived safety of bonds, our managers took advantage of generous dividends and capital growth in a portfolio of leading Canadian companies.

Do you think I made those numbers up? Nope. Both the index returns and the funds’ performance are real—except the “MegaAlpha Awesome Income Fund” is actually the iShares DEX Universe Bond Index Fund (XBB),

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Can the Pros Time the Market?

I never meant to make you cry
And though I know I shouldn’t call
It just reminds us of the cost
Of everything we’ve lost
Bad timing, that’s all
Bad Timing, Blue Rodeo

One of the promises made by active managers is that they can move to cash before the markets tank and then get reinvested before they recover. When markets are as volatile as they have been in recent years, a manager with this skill would be something of a hero.

I recently looked at the record of actively managed mutual funds during bear markets for an article just published in Canadian MoneySaver. I found that there were indeed periods where managers were able to protect investors from losses. The problem was that defensive mangers were usually late to the recovery party. As a result, over an entire market cycle most investors are usually better off staying fully invested all the time.

Shortly after the article appeared, I heard from a member of the investing club I belong to. He told me that one the other club members,

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ETF Risks in Perspective: Securities Lending

This is the final post in a series of three looking at the potential risks that ETFs may pose to the stability of financial markets. The previous two discussed synthetic and leveraged ETFs. Now we’ll take a look at the practice of securities lending.

Many active traders, including hedge funds and prop traders at investment banks, engage in short selling when the they believe a stock is about to fall in price. For example, if a company is trading at $20, a short seller might borrow shares and sell them on the open market for that price. If the stock falls to $18, the trader can then buy it at this lower price, return the shares to the lender, and pocket a profit of $2 per share (before costs).

Firms that borrow shares need to get them from somewhere, and the most common lenders are mutual funds, ETFs and pension funds, who use securities lending agents as intermediaries. When a fund lends shares to a short seller, it collects a fee for doing so.

The problem

The main concern about securities lending is common to all funds,

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