It’s been barely a month since Alexander Green remarked that we’re currently enjoying “the most disrespected bull market in history.” Green described how investors who were shell-shocked by 2008 were still pulling money out of equities and taking shelter in fixed income and cash. And until very recently, the financial media were fanning the flames of pessimism: a Wall Street Journal reporter called 2012 “another very difficult year for investors” even though the MSCI World Index was up over 16%.
I’m ready to declare this trend is reversing. I have no hard data, but in the last couple of weeks I’ve noticed a dramatic shift in the tone of reader emails. For almost three years, the common refrain was “I’m nervous about getting into stocks because the markets have been terrible lately.” But since the New Year, that’s changed to, “I’m nervous about getting into stocks because the markets have been so good lately.”
In case you missed the irony, let me hit you over the head with it: instead of being afraid because stocks fell sharply in 2008, investors are now afraid because they’ve risen sharply since 2009.
I don’t mean to poke fun at people’s fears. I bring this up because it’s a lesson for investors who have been waiting on the sidelines “until things settle down.” Since the financial crisis, we’ve endured rumours of a double-dip recession, a downgrade of US debt, serious macro problems in Europe, and the fiscal cliff. All those events made investors avoid equities because they feared more losses. I don’t know what lies ahead, but it might be fair to say things have now settled down. But instead of re-entering the market, these same investors are now avoiding them because they think prices are too high. So when exactly do you pull the trigger?
This is what happens when you rely on emotion to make investment decisions. A better approach is to set a long-term asset allocation based on your goals and your temperament and then rebalance according to a schedule. A strategy of buy-hold-rebalance can still be emotionally difficult, but if your asset mix is appropriate you should never find yourself on the sidelines again.
@CCP: Whoops — I think there was a typo in your reply to Ryan.
“Typically it’s 2 cents on share price around $10, which is a 20-bps round trip, not 60 bps.”
I believe you meant 20-bps for the two trades to go from CAD to USD, which means 40-bps round trip back to CAD — after all, you explained this very carefully in your December 20, 2012 reply to me under the “How Much Are You Paying For US Dollars?” article (unless I misunderstood some essential step along the way).
@Oldie: You’re correct: if the spread is two cents, it’s about 20 bps to go from Canadian to US, and another 20 bps to bet back to Canadian. Sorry for the error.
@Why Bonds?: In the 7 months since I started my finance and investments education from scratch by just reading this CCP blog and discussion, I have absorbed the following truths about the fundamental principles of Passive Index Investing as they relate to your query. Please understand that these are the insights of a neophyte — I believe these are accurate, but I invite correction from CCP and other wiser commenters.
1) The true Couch Potato is agnostic about the future and pays no heed to “expert” or “common” wisdom regarding the economic future. Therefore “in light of impending interest rates hikes” is a meaningless preamble. Sure, intermediate/long term bond funds would take an immediate value hit should interest rates rise abruptly as per your prediction, but over the past few years investors abstaining from bond investments in the light of similar fears to what you are quoting have missed out on the bond fund returns enjoyed by dutiful investors continuing to remain invested according to their predetermined bond fund allocations. Remain agnostic.
2) If you are truly tolerant of 100% risk, why would you suddenly change your risk tolerance and suddenly purchase bonds. Remember, you are supposed to be agnostic, and you don’t know when the price drop of bonds will occur, or when the right time comes to buy. All you can achieve with certainty is as realistic an assessment of your risk tolerance as you can figure out, and then to purchase assets classes in an allotment ratio in keeping with that assessment, rebalancing the ratios when they drift out of alignment, which will happen.
3) My understanding is that it is unwise to invest 100% in equity, despite your alleged risk tolerance. Even if you have only 25% in fixed income it would give a significant risk buffer against drops in equity values; the minimal added upside in increasing your equity exposure from 75% to 100% doesn’t seem worth the loss of relative safety. I must admit I am a little hazy about the risk-benefit merits of this last point #3, as at my stage of life I would not consider an equity percentage at that end of the spectrum, so I haven’t given it much thought — perhaps CCP can give a more well thought out perspective on this.
@ Why Bonds: I like how Oldie so eloquently gave out the reasons to own bonds. I’m also a neophyte when it comes to passive investing, and I wholeheartedly agree with him. Here is a recent post from Monevator about why invest in bonds. Really good read.
http://monevator.com/shares-deliver-the-best-long-term-returns-so-why-invest-in-bonds/
Questrade customer service is absolutely rubbish. Honestly some of the worst I’ve ever receieved. I’m not talking about making trades, rather the administrative side. I had some problems with spousal RRSP contributions and it took almost 10 months for them to correct the contribution receipts. Try filing your taxes on time!
That’s why I moved my main account to Qtrade. I don’t think I’ve ever had to wait to talk to an agent, and they have been extremely helpful with any problems I’ve had. I recommend them without reservation. I do, however, hope that they expand their selection of commission-free ETFs.
@Dan, you mentioned that you use HXS for your RESP, do you have an international asset, if so, what did you choose and why?
@Que: Nope, no international equities in the RESPs.
I have a questrade account b/c I wanted to sign up with a discount brokerage when I first looked into getting a trading account. However, questrade annoys the heck out of me because they are always offline! This is especially annoying because I live on the west coast and by the time I want to look at my accounts, their websites are always down (yes all 7 days of the week). And, their customer service is horrible, I try to avoid them at all cost..but it’s hard not to because sometimes their system does funny things (ie. cancel my trade orders but send me funny notification emails and then I have to call them to find out what happened. If their system didn’t mess up I would have added positions during last year’s dips, however, my orders were cleared without my knowledge (and I wasn’t following the market all that closely that time). I am still choked about that. Following this I took the opportunity to transfer some of my holdings out of Questrade and into my new trading accounts at CIBC at the end of the year for tax loss, TFSA withdrawal deadlines, etc.
CIBC Investors Edge is nothing spectacular, but I always get excellent customer service and reliable platforms with the added bonus of the loyalty promo. (6.95) per trade. For 2 dollars more, I get a lot more satisfaction.
I did kept my RRSP accounts at Questrade b/c I didn’t want to close all my accounts. I like the fact that they have the CAD/US conversion..so, I like to use Questrade for my RRSP, where I am just adding US ETFs for the long run. Quite nice that I got my ETF rebate as I just bought VWO when it dipped slightly this week. It is a good way to add positions.
However, if CIBC brought in the same automatic CAD/USD conversions in their accounts, I would be tempted to close my questrade accounts.
@Maybelline: check out BMO Investorline, they have all the CAD/USD/RRSP bells and whistles, plus you can do Norbert’s gambit 100% online (no phone calls). $10 per trade, but as a passive investor, I’m not trading often so it’s fine. The fact that I can avoid hefty foreign exchange fees while investing in US ETFs makes it completely worth it.
I was using Questrade a while ago, but I also found their customer service to be terrible (plus their website is poorly designed and confusing). That’s why I moved all my money to BMO.
I completely agree that fear of buying into a hot market right now is a little ridiculous from a couch potato perspective… especially looking long term. The problem is for someone looking to buy-in in a big way, market timing does have an impact (although long term very minor I suppose) .. just feel it may be better to wait for a small ‘correction’ to pull the trigger..
@Adam: Really? My girlfriend and I bought ING streetwise index funds les than a month ago. Should we just sell everything right now?
@Dave L: Thank you, but I assure you there was no originality in my comment — I merely expressed my (hopefully precise) distillation of the collective wisdom gleaned from this hugely valuable resource, available for free to any determined investor willing to read and think about the CP mini-lectures as they appear, plus the discussions that follow, (starting from “now” and then going backwards in time to the origin of this blog). As I said, above, I am confident that I have got the broad strokes down, but the finer points will take more time and “Couch Potato mashing” before further subtleties get absorbed.
@bettrave – No, not what I’m suggesting at all. You’ve bought, now hold for long term. You probably did quite well in the last month anyway.
@Why Bonds?: My comments pro-bonds were specifically related to your described situation, i.e. in an RRSP. Bond fund returns in a taxable account are taxed unfavourably and you must weigh this quirk in planning your strategy.
@Oldie: Generally a fixed bond allocation does make sense if you don’t want to have to know much about the market. Personally I believe the market sometimes swings based on emotions. For example in early 2009 investors were a little too excited about owning bonds instead of stocks. Unfortunately we can’t relive that but I (personally) invest on the idea that we’re still feeling the after-effects of that. I’ve seen a few references to optimal bond allocations that actually increase long returns (in some studies it looks like having more than 10% becomes a drag). But if you might need to withdraw some time in the next 10 years then you can’t focus purely on long-term returns.
@Adam that small correction could be a long time coming; we never know what we might be missing out on when we wait. If you have a large amount to invest today the best you can do is allocate it between asset classes based on their probable future returns. On that basis stocks still look much better than cash or bonds to me, although I wish they would stay cheaper.
I’ve had nothing but good experiences with Questrade.. been with them for just over a year now. I had an issue with getting an account validated but I sent a detailed email and they got back to me right away. It is perfect for a couch potato portfolio now with no commissions for buying ETFs. They close down their servers for maintenance at 10pm EST, but you can’t add any positions to your long term low-cost indexed portfolio then anyway. You can withdraw up to $25k with no commissions at any time.
Been with Questrade since 2010, sometimes they’re slow, but it’s cheap and I’ve found the online help to be sufficient for my simple needs.
If buying any ETF is free. Do you think it affect the Couch Potato portfolio in a way that you might prefer for example to split the bond allocation into 2 ETF rather than 1 for better diversification?
I think in an earlier post you suggested that large portfolio should split the bond ETF.
Of course I am talking for long term investor for which selling is far far away.
@Tommy: You could use two bond ETFs to customize your mix of government and corporate bonds, or to shorten the duration of your overall holding. But I don’t think commission-free policies have anything to do with that decision. Your chosen asset allocation should not be based on saving $10 here and there.
I use Scotia iTrade and I have not experienced any trouble with setting up my account or buying into my 3 commission-free ETF’s once every month. I also have their app on my iphone and it works great as well! I am a very simple Couch Potato investor (a single mom) who doesn’t have a choice but to be a slow and steady investor. My US ETF is 15% of my asset allocation and some months that only works out to 4 or 5 shares and as I put in my order, I often wonder at the comments when those poor traders have to try to fill my piddly little order :)
In reference to an earlier comment about former Claymore (iShares) having a preauthorized contribution plan…I believe that iShares did away with that plan when they took over Claymore.
I have a question that I hope is not out of line to ask here. I buy 35% Cdn ETF, 30% Corporate Bond ETF, 15% US ETF and 20% into ING GICs. Should I add a dividend ETF into the mix as well? I have been reading up on Dividend investing and can I cover that by buying an ETF or must I invest into individual stocks?
I also have $50,000+ in mutual funds in a RSP at BMO and if I move it to their Investorline and invest into ETFs I will not incur any transfer fees and just have to pay the trading fees which will be less because it is over 50G. So, this week’s job is to look at their ETFs and decide which I want as I am looking to lower my MERs. Anyone have any BMO ETF favourites? I am asking this understanding that I have to make the final choice and it is my responsibility.
I need some clarification…I thought that if you had US funds in your RSP there was no withholding tax? I am hoping that I have misunderstood the earlier comments about US withholding taxes.
I have become a personal financial blog fanatic. I want to thank all of you for your great posts and I am learning new things everyday. I am subscribing to more and more Canadian PF blogs and then I click on links and more links and more links……well you get the picture!!
@Lydia: Thanks for sharing your comment.
In my opinion, a diversified portfolio does not need to include dividend-focused ETFs: a single, broad-market ETF for each of Canada, the US and international equities is more than adequate.
If I understand your comment, you should not need to transfer your BMO mutual funds to BMO InvestorLine, and even if you did, you would not have to confine yourself to BMO ETFs. All ETFs are available through any brokerage. They may have told you that because they want to keep you as a client. If you already have a Scotia iTrade account and you’re happy there, you could transfer your BMO RRSP to iTrade so all your accounts are in one place. (You may have to sell the mutual funds first and just transfer the cash.) You will pay a transfer fee of about $150, but iTrade may reimburse you: definitely worth asking, as this is common practice.
Re: withholding taxes, if you hold a US-listed ETF (i.e. one that trades in US dollars on the NYSE) in an RRSP then your are exempt from the withholding tax. But if you use a Canadian-listed ETF that holds US stocks, the withholding tax is payable.
Sorry to be asking such newbie questions….but, how do I know if it is US-listed or Canadian-listed? Is it whether or not it is hedged or non-hedged? I have CLU and it is hedged. What happens with the withholding tax? Is it alot? Is it already figured in the MERs? Is it something that they hold and you apply to get back? Do I need to do anything about this at tax-time?
I’ve gone through the “live within your means & pay off your debt & set up emergency fund” stage and the “invest in mutual funds every month for cost-based averaging phase”. Now I am in the ETFs and passive/couch potato/asset allocation stage and I am now trying to move into RSP/TFSA best tax-planning scenario phase. I do not believe that I will ever be able to invest more than my RSP and TFSA maximums. I just took out a 15-year mortgage 2 years ago and I am on track to have it paid off in the first 5-year term.
With every transition, I am learning a lot and have to push myself through comfort zones. Thanks for your patience as I keep learning new things.
@Lydia: Don’t worry about asking questions: that’s what we’re here for. “Canadian-listed” means the ETF trades on the Toronto Stock Exchange. When you place an order to buy an ETF you need to specify the exchange, so it should be clear. All of the iTrade commission-free ETFs are Canadian-listed, including CLU.
The withholding tax on US dividends is 15%, so if the annual is dividend 2%, that works out to an additional cost of 0.30% a year. On a small portfolio that’s really not a big deal. This amount is not included in the MER, and you don;t need to worry about reporting at at tax time if you’re investing in an RRSP. If you were investing in a taxable account, you can apply for the foreign tax credit and reclaim it.
From the sounds of it, Lydia, you are doing extremely well with limited resources. Please don’t spend time worrying about the small details of this or that ETF. Just keep doing what you’re doing: paying down debt and saving for the future/ That’s what’s really important.
@Lydia: welcome, New Potato, to the community. Your progress so far should be an inspiration to all us Newbies! Knowledge is Power. Keep it up and eventually it will be Knowledge is Wealth.
@Canadian Couch Potato: I have both TD and Questrade accounts. I have focused everything in my TD RRSP and TFSA. The Questrade account is a TFSA but was opened really for experimentation purposes, before I had a strategy (the account has just enough in it to keep it open).
Both TD accounts have e series bonds (percentage matches my age), US, Cdn, Intl components (divided evenly). I contribute twice a month. Now that Questrade has removed their ETF fees, I’m considering whether to move everything over. The costs of doing this would be: much of the TD holdings have not been held for their minimum holding period; TD will charge $250 for moving the RRSP, which Questrade will not pay because the account is too small; I’m not entirely sure how the forex and withholding taxes will affect the Questrade accounts (not at all if I buy XBB, XIU, XSP, XIN??); and Questrade will charge about $20/month inactivity fee if you don’t touch it for more than a quarter (not applicable to me now, but in the future, who knows?).
On the other hand, TD charges $120/year for the RRSP (Questrade does not), and the MERs are higher than ETFs.
I’m thinking maybe I shouldn’t sweat the small stuff and stay with TD until the MER difference becomes really significant. Also, I think if I’m going to do this for 40 years, it may be safer to leave it with TD than go to Questrade in terms of the longevity of the brokerage itself.
Any helpful comments would be greatly appreciated.
@Cam: You should be able to take advantage of TD’s Basic SDRSP, which charges only $25/month on account under $25K, and is free if your balance is higher than that:
http://www.tdwaterhouse.ca/products-services/investing/discount-brokerage/types-of-accounts/assd.jsp
If you can get rid of that $120 annual fee you’re paying now, the e-Series funds sound more appropriate than ETFs until your portfolio is much larger.
Why don’t you juste stay with TD without converting your account to a waterhouse one you wont pay any fee if you stay away from waterhouse.
@CCP and @Frank: Thanks, I sent an email to my account manager to see how we can change the account. It’s unfortunate that they don’t go through all the options with you when you’re setting up the account.
My new QT account opening experience: Overall a good and quick experience. I filled the application online and uploaded it with my photo id. It took 1 business day for them to check my photo id. Then I transferred funds from TD to QT which took 3 business days. So, all is all, my account is now open in 5 business days. I did not have to mail anything to them. Its time to look at the Model portfolios and think of which ETF’s I want to buy now :-). I have US account with TD, so I assume the ETFs in Global Couch Potato which are traded in USD, I should rather use my USD to buy them??
@NJ: Glad to hear your experience was painless.
If you have USD cash, then yes, that should be what you use to buy any US-listed ETFs. Any time you can avoid currency conversion you’ll enjoy significant savings.
Anyone aware of ECN fees on Questrade?
http://www.questrade.com/pricing/exchange_ecn_fees.aspx
@bettrave: I bought 93 shares of XDV in October 2012 (before Questrade changed their policy to not charge commissions on ETF purchases) and paid a total commission of $5.28. This exactly matched the posted ECN fee schedule: $4.95 + ($0.0035 * 93).
If I were to make the same purchase today, I believe that I would pay $0.33 in ECN fees on the purchase.
I signed up with Questrade in mid-May. Their customer service was excellent. They followed up quickly on my inquiries and I haven’t had any issues with their service. I really enjoy the commission free ETF purchases. If you’re not investing much, it makes a really big difference on your return.
@Cam @CCP @Frank
TD Basic SDRSP has administration fee of $25/year +GST/HST. This will be waived when your balance is >$25,000. You can not hold stocks, options, or mortgages in this account. No mention is made about the eligibility of ETFs for this plan. I suspect they are not allowed.
ETFs, bonds, stocks, etc. are eligible within a registered TD Waterhouse Direct Investing account. Annual fee is $100/year, but waived for +$25,000.
I have one of each – the Basic for a small spousal RRSP/RIF that has only TD funds and would never need to buy stock/ETFs. The full registered RIF Direct Investing account now has TD e-Series funds and ETFs. Stock holdings are in another place.
My suggestion is use the Basic plan and e-Series funds until your balance is $25,000 – $50,000. You can always transfer to the a full RRSP later. Then maintain the required balance = no administration fee. Have +$50,000 = $9.99 trading cost.
Keep your costs low and keep saving. It pays off.
@Cory
Can you tell us *how* you are doing Norbert’s Gambit ‘all online’ at Investorline? I am unable to trade DLR.U online and the gentleman I just spoke to on their service desk said they would not journal between DLR and DLR.U regardless. He even suggested I buy DLR.U and settle in Canadian dollars, which would seem to defeat the purpose.
Any help would be appreciated.
@Robert:
Sure, it’s not very hard to do Norbert’s Gambit on BMO Investorline. I just did it today, in fact. You can use any reasonably liquid interlisted stock, so it doesn’t have to be DLR. Personally, I use RY (Royal Bank). There’s plenty of other interlisted stocks that work, too, like most of the Canadian banks and resources companies. It doesn’t really matter which one you use, just don’t pick something really obscure.
Here’s the steps once you’re logged onto the Investorline website:
1) Click “Trading->Equities” to buy some shares (let’s say 100) of RY on the Canadian market. Specifically, the “Action” should be “Buy”, the “Market” must be “Canadian”, the symbol should be “RY”, the quantity should be 100 (or however much you want) the “Trade Price” should be “@Market” and the Settlement funds should be “Canadian Dollar”.
2) It should only take a couple seconds for the trade to fill, assuming you do it during trading hours and you have enough Canadian dollars in your account to buy the shares. If you want, click “Trading -> Order Status” to confirm that you trade has been filled, or just look at your holdings; once you’ve got your 100 shares of RY, you’re ready to do the next step.
3) Click “Trading->Equities” again, this time you’re gonna sell those 100 shares of RY on the US Market, and settle in US dollars. More specifically, the “Action” should be “Sell”, the “Market” must be “US”, the symbol should be “RY”, the quantity should be 100 (or however much you just bought) the “Trade Price” should be “@Market” and the Settlement funds should be “US Dollar”.
That’s it! A few seconds later, you’ve converted your CAD to USD for the price of two trades (plus a very little bit for the bid-ask spread). I’ve done this numerous times without problems, and it really does work. And if you’re dealing with more than $5000 or $10000, it’s much cheaper that just using BMO investorline’s foreign exchange tool.
NOTE: you will see that your portfolio has two unexpected entries in it, one for “100 shares of RY” on the CAD side of your account, and one for “-100 shares of RY” on the USD side. These entries cancel each other out, of course, so the total balance in your account is still correct, but it can be kind of unnerving to see those two strange entries sitting there. Not to worry, though. Nothing is wrong. These two entries will automatically “flatten out” (i.e. disappear) on their own–I’ve had it take anywhere from a day to a week for this to happen, but it does happen eventually.
@Cory:
Thanks for the detailed step-by-step instructions. I just logged in and confirmed that RY is available on the US market side in my account, so I should be able to convert USD to CAD as well.
Thanks again!