So you've got your finances in order, and after paying for living expenses, insurance, and funding your emergency fund, you find you have some money left over to invest. Great! Now you're itching to get your account opened so that you can place your first trades and make tons of cash! Well, before you do that, it's probably a good idea to do some practice trades. There are plenty of stock simulator sites out there for you to get your feet wet.
While you probably have an idea of what you want to buy, you may not be familiar with the types of orders you can enter, or how to enter the order at all. Having a trial run of this using play money will save you from the frustration and embarrassment of entering an incorrect trade with your real money. Market orders and Limit orders will probably be your most common order types, so try entering a few on a simulator. If you have enough time (a few months at least), try joining a game and see how you do.
If you're going to make mistakes while you learn how to enter orders, better to do it with fake cash!
Tuesday, March 31, 2009
Saturday, March 28, 2009
Vanguard Emerging Markets ETF Expense Ratio Raised
Looking over the Vanguard ETF site, I noticed that the expense ratio for VWO has been raised from 0.25% to 0.27%. The site says that this was changed on February 26, 2009. The expense ratio for VWO has bounced around slightly in the last few years. It was 0.30% in 2006 and then lowered to 0.25% in 2007.
Considering that the average ETF expense ratio in this category is around 0.55%, the Vanguard offering is still very good.
Considering that the average ETF expense ratio in this category is around 0.55%, the Vanguard offering is still very good.
Friday, March 27, 2009
Preparing to Invest: Have a Plan
Before you deploy your investment dollars, have an investment plan. Get it down on paper along with your reasons so that when things get scary, you will stick to your plan. For asset allocators using index funds, this might look something like:
Reasons to revisit your plan include changes in the following:
Poor reasons to revise your plan are usually predictive and short term issues such as:
| What | Why |
|---|---|
| Stock/bond split | Risk control |
| Asset allocation | Diversification, opportunities for capturing benefits during re-balancing |
| Re-balancing strategy | Systematic method of capturing diversification benefit (buying low, selling high), Risk control |
Reasons to revisit your plan include changes in the following:
- marital status or family
- job
- tax laws
- life changes affecting your income/expenses
- life goals (eg. you no longer want to sail around the world--helping to raise the grand kids is what you really want)
- periodic adjustment for age/investment horizon (this is a risk adjustment done maybe every 5 years)
- financial system (should be pretty rare--these are not economic or political events)
Poor reasons to revise your plan are usually predictive and short term issues such as:
- hot tips forecasting the next growth opportunity
- trying to predict the effect of an economic or political event
- predictions of interest rates and monetary policy
Wednesday, March 25, 2009
Preparing to Invest: Get To Know The Available Account Types
RRSP, RDSP, RESP, TFSA, RRIF, DPSP! There are many types of accounts/plans available to help you grow your money faster. Get to know how they work, so you can make the best use of them and allocate your investments to the proper accounts from the get go.
Let's look at the RRSP and TFSA since they are probably the most common. The main benefit for both of the accounts is that growth in the accounts are not taxed while they stay in the plan. How about some of the differences?
But that's not all! RRSP withdrawals before retirement incur an early withdrawal penalty while TFSAs do not. Check out the withholding tax chart for early RRSP withdrawals. (Note these are not exactly your final tax rates on these withdrawals. You might think that if you make 3 withdrawals of $5000 that you will be taxed only 10% instead of 30% on a lump sum withdrawal of $15,000, but since these withholding taxes are estimates, you will end up with a huge tax liability at tax filing time when your final tax rates are calculated.)
As you can tell, there are many rules and eligibility requirements. Get to know the different account types so that you can make good use of the benefits available!
In the general case (and remember, none of us is average, so adjust for your own situation!), for someone saving for retirement, I would recommend filling up an RRSP first. Of course, top up both accounts every year if you can!
Let's look at the RRSP and TFSA since they are probably the most common. The main benefit for both of the accounts is that growth in the accounts are not taxed while they stay in the plan. How about some of the differences?
- Contributions to an RRSP are tax deductible while TFSA contributions are not.
- Withdrawals from an RRSP are taxed as income while TFSA withdrawals are not taxed at all.
But that's not all! RRSP withdrawals before retirement incur an early withdrawal penalty while TFSAs do not. Check out the withholding tax chart for early RRSP withdrawals. (Note these are not exactly your final tax rates on these withdrawals. You might think that if you make 3 withdrawals of $5000 that you will be taxed only 10% instead of 30% on a lump sum withdrawal of $15,000, but since these withholding taxes are estimates, you will end up with a huge tax liability at tax filing time when your final tax rates are calculated.)
As you can tell, there are many rules and eligibility requirements. Get to know the different account types so that you can make good use of the benefits available!
In the general case (and remember, none of us is average, so adjust for your own situation!), for someone saving for retirement, I would recommend filling up an RRSP first. Of course, top up both accounts every year if you can!
Farewell to the Gummy Stuff
It looks like Gummy is taking down his useful site. It's a bit overwhelming at first, but just take a look through some topics that you are interested in to start. Be sure to check out his numerous and sophisticated spreadsheets.
Sunday, March 22, 2009
Preparing to Invest: Be a Saver
You can't build real wealth and financial security if you are not regularly saving money. Yes, you can "own" a really nice car and a big house by the water by borrowing, but that debt is a liability that you'll never pay off if you are not saving.
Borrowing money to invest is a risky prospect too. Suppose your lender is going to charge you around 5% in interest. This is payable no matter how your investment does. Lose money, and you still have to pay interest on your loan (and eventually pay back the principle as well). And when you make money, considering that stocks average 8 to 10% annual gains in the long run, a 5% bite for interest payments is substantial.
Controlling your costs and spending is key to saving. Contrary to what advertisers imply, you do not automatically deserve to have the latest and greatest just because people around you are getting one. It does not serve you to envy them. If you can afford it, by all means, go ahead. But recognize when you cannot afford it (hint: if you can't pay for it with cash, you probably can't afford it. If you have to dip into your emergency fund, you probably can't afford it.) You don't need to keep up with the Joneses when chances are, under the nice shiny exterior, the Joneses are broke.
So how can you save? If you have the will, you can set a percentage (I suggest at least 10%, but the more the better) of your income to try and set aside as savings. Then look at your spending patterns and separate your needs and wants. Cut down on your wants to achieve your savings goal. Adjust what you spend on your needs (are there lower cost alternatives?) If you need a bit of help, try a "forced" savings plan by automatically depositing your savings goal into a savings account (like a high interest savings account). Places like ING Direct offer such a service (ING calls theirs the Automatic Savings Program).
Borrowing money to invest is a risky prospect too. Suppose your lender is going to charge you around 5% in interest. This is payable no matter how your investment does. Lose money, and you still have to pay interest on your loan (and eventually pay back the principle as well). And when you make money, considering that stocks average 8 to 10% annual gains in the long run, a 5% bite for interest payments is substantial.
Controlling your costs and spending is key to saving. Contrary to what advertisers imply, you do not automatically deserve to have the latest and greatest just because people around you are getting one. It does not serve you to envy them. If you can afford it, by all means, go ahead. But recognize when you cannot afford it (hint: if you can't pay for it with cash, you probably can't afford it. If you have to dip into your emergency fund, you probably can't afford it.) You don't need to keep up with the Joneses when chances are, under the nice shiny exterior, the Joneses are broke.
So how can you save? If you have the will, you can set a percentage (I suggest at least 10%, but the more the better) of your income to try and set aside as savings. Then look at your spending patterns and separate your needs and wants. Cut down on your wants to achieve your savings goal. Adjust what you spend on your needs (are there lower cost alternatives?) If you need a bit of help, try a "forced" savings plan by automatically depositing your savings goal into a savings account (like a high interest savings account). Places like ING Direct offer such a service (ING calls theirs the Automatic Savings Program).
Friday, March 20, 2009
The Market is Not Alive
Financial reporting requires a certain amount of creativity to be able to come up with stories that people will read daily. Among the imaginative creations is the idea that the market is alive and has a personality. This gives rise to headlines like "After four up sessions, Wall Street takes a breather". Presented in this way, it almost makes sense that yes, Mr. Market must be tired after climbing for four days and should take a well deserved rest.
Although it can be fun to think otherwise, temperamental Mr. Market does not exist. The market does not have a personality other than what we give it in hindsight.
Although it can be fun to think otherwise, temperamental Mr. Market does not exist. The market does not have a personality other than what we give it in hindsight.
Thursday, March 19, 2009
Preparing to Invest: Protect Yourself, Your Dependents, and Your Belongings
Personal finance is about more than just your stock picks or your carefully selected asset allocation. A holistic view of your finances also includes your ability to handle financial surprises, and protection against financial catastrophe. These come in the form of your emergency fund and various types of insurance.
Emergency Fund: It is usually recommended to have 3 to 6 months worth of living expenses (not salary) in your emergency fund. Tally up your rent/mortgage, food, bills, fuel costs, monthly insurance premiums, etc. and set aside 3 to 6 times that value in your emergency fund. Keep this money liquid, so that you can access it relatively quickly. For example, put it in a savings account, money market mutual fund, or cashable GIC.
Why do you want to have this set up before you invest? Since the markets are volatile and emergencies and financial surprises can happen at any time, you really don't want to be forced to cash your investments when the markets have taken a nosedive, as they do from time to time.
Insurance: Protect yourself from financial ruin. The types of insurance you need will vary based on your situation, and in some cases your employer may provide some coverage for you. Some of the more common types of insurance you need are:
Emergency Fund: It is usually recommended to have 3 to 6 months worth of living expenses (not salary) in your emergency fund. Tally up your rent/mortgage, food, bills, fuel costs, monthly insurance premiums, etc. and set aside 3 to 6 times that value in your emergency fund. Keep this money liquid, so that you can access it relatively quickly. For example, put it in a savings account, money market mutual fund, or cashable GIC.
Why do you want to have this set up before you invest? Since the markets are volatile and emergencies and financial surprises can happen at any time, you really don't want to be forced to cash your investments when the markets have taken a nosedive, as they do from time to time.
Insurance: Protect yourself from financial ruin. The types of insurance you need will vary based on your situation, and in some cases your employer may provide some coverage for you. Some of the more common types of insurance you need are:
- Disability Insurance (protect your ability to earn)
- Health Insurance (protect from possibly huge medical bills)
- Life Insurance (protect your family's income)
- Home Insurance (protect your property and possessions)
- Vehicle Insurance (protect your vehicle and get coverage for liability)
Tuesday, March 17, 2009
BMO Investorline Finally Offers RESP Accounts
This is a bit older news, but BMO Investorline finally announced the availability of RESP accounts earlier this year. Considering TD Waterhouse, RBCDI, Scotia McLeod Direct Investing, HSBC InvestDirect, CIBC Investor's Edge, and cost leader Questrade all offer RESP accounts, it's about time that Investorline got this rolling!
Monday, March 16, 2009
The Cost of Doing Nothing
In today's extreme bear market, the urge to hide all your cash under the mattress can be pretty strong. Why invest in a market that can produce such horrible losses?
Inflation is the nasty phenomenon that will eat at the purchasing power of your cash year after year. The Consumer Price Index (CPI) is tracked by Statistics Canada and shows the rate at which the prices of goods and services has changed. An inflation rate of 2% means that in general, something that costs $100 in one year will cost $102 by the next year, reducing the purchasing power of your 100 dollars. The Bank of Canada targets an inflation rate of 1% to 3%, but we have seen double-digit inflation as recently as the 1980s.
What does this mean for your $100 if you stash it under your mattress and take it out again when you retire in say 30 years? Let's say you put $100 away 30 years ago in 1979. The average annual rate of inflation over those 30 years was 3.69%. According to the Bank of Canada Inflation Calculator, something that cost $100 in 1979 would cost $296.59 today. Another way to look at it is that the value of your initial $100 would be $33.72 after the effects of inflation. That's a 2/3 reduction in the value of your money!
So in order to preserve the purchasing power of your hard earned cash, you simply must invest and at least keep up with inflation (after paying taxes on your earnings).
Inflation is the nasty phenomenon that will eat at the purchasing power of your cash year after year. The Consumer Price Index (CPI) is tracked by Statistics Canada and shows the rate at which the prices of goods and services has changed. An inflation rate of 2% means that in general, something that costs $100 in one year will cost $102 by the next year, reducing the purchasing power of your 100 dollars. The Bank of Canada targets an inflation rate of 1% to 3%, but we have seen double-digit inflation as recently as the 1980s.
What does this mean for your $100 if you stash it under your mattress and take it out again when you retire in say 30 years? Let's say you put $100 away 30 years ago in 1979. The average annual rate of inflation over those 30 years was 3.69%. According to the Bank of Canada Inflation Calculator, something that cost $100 in 1979 would cost $296.59 today. Another way to look at it is that the value of your initial $100 would be $33.72 after the effects of inflation. That's a 2/3 reduction in the value of your money!
So in order to preserve the purchasing power of your hard earned cash, you simply must invest and at least keep up with inflation (after paying taxes on your earnings).
Thursday, March 12, 2009
An Example of Allocating Holdings to Minimize Taxation
As a follow-up to yesterday's post on taxation of different income types, I want to go through an example so that you can see how one might think about where (RRSP, TFSA or taxable accounts) to hold different funds in your portfolio.
Let's consider what happens if you decide on an asset allocation of 25% each in the following types of index funds:
Bonds count as interest income and are fully taxed at your marginal rate.
Canadian Equities, when in an index fund, generally produce dividends and small capital gains. (In an actively managed fund, expect higher realized capital gains for which the tax liability is passed on to you.)
Similarly, the US Equity fund also generates dividends and some small capital gains, but these are considered to be from foreign sources.
Finally, the EAFE (roughly the rest of the developed world) Equity fund, since it covers a (generally) more volatile index, will probably generate more capital gains, as well as some dividend income. As with the US Equity fund, this income is considered to come from foreign sources.
In my opinion, and I'm no tax specialist, I would definitely put the Bond fund into the RRSP since its interest income would otherwise be taxed at your full marginal rate. The Canadian Equity fund would go into the taxable account to take advantage of the reduced tax rates on Canadian dividends and capital gains.
It's a bit of a toss-up between the US Equity fund and the EAFE fund, but I would put the US Equity fund into the taxable account and the EAFE fund into the RRSP since I believe that the US Equity fund will trade less and therefore generate fewer realized capital gains tax liabilities.
RRSP: Bond fund, EAFE fund
Taxable account: Canadian Equity fund, US Equity fund
Strategically allocating your holdings in your taxable and tax-sheltered accounts will help ensure that no matter what earnings you make, you actually keep the highest percentage for yourself as possible.
Let's consider what happens if you decide on an asset allocation of 25% each in the following types of index funds:
- Bonds
- Canadian Equities
- US Equities
- EAFE Equities
Bonds count as interest income and are fully taxed at your marginal rate.
Canadian Equities, when in an index fund, generally produce dividends and small capital gains. (In an actively managed fund, expect higher realized capital gains for which the tax liability is passed on to you.)
Similarly, the US Equity fund also generates dividends and some small capital gains, but these are considered to be from foreign sources.
Finally, the EAFE (roughly the rest of the developed world) Equity fund, since it covers a (generally) more volatile index, will probably generate more capital gains, as well as some dividend income. As with the US Equity fund, this income is considered to come from foreign sources.
In my opinion, and I'm no tax specialist, I would definitely put the Bond fund into the RRSP since its interest income would otherwise be taxed at your full marginal rate. The Canadian Equity fund would go into the taxable account to take advantage of the reduced tax rates on Canadian dividends and capital gains.
It's a bit of a toss-up between the US Equity fund and the EAFE fund, but I would put the US Equity fund into the taxable account and the EAFE fund into the RRSP since I believe that the US Equity fund will trade less and therefore generate fewer realized capital gains tax liabilities.
RRSP: Bond fund, EAFE fund
Taxable account: Canadian Equity fund, US Equity fund
Strategically allocating your holdings in your taxable and tax-sheltered accounts will help ensure that no matter what earnings you make, you actually keep the highest percentage for yourself as possible.
Wednesday, March 11, 2009
Managing Taxes on Your Investments
If you're new to investing or taxes, or have never done your own taxes, you may not know that different types of income are taxed at different rates. Your salary is taxed at your regular income rate (which is a progressive system in Canada--the first X dollars are taxed at a certain percentage, and the next Y dollars are taxed at a higher percentage, and so on). The tax rate on your last dollar (i.e. the highest tax level that you hit) is your marginal tax rate.
How does this relate to your investments? Investment income can be grouped into 3 basic categories:
Capital gains tax is calculated by taking half of the taxable amount, and then applying your marginal tax rate. In other words, capital gains are taxed at half the rate of interest income.
Dividends are a bit trickier since there is a tax credit involved, but as you can see from the chart on TaxTips.ca, they are taxed generally at the lowest rate.
Keep in mind that income from foreign sources is generally taxed as regular income. The type of income--interest, capital gains, or dividends--does not matter for foreign sources. You may want to check for tax treaties with other countries to see if there are exceptions in your case.
I won't go through the exact rates or methods of calculation since they change from time to time, but you can see that some income is tax advantaged, and some (interest and foreign) is not. For example, suppose you could earn 3% interest income in a high interest savings account, or earn 3% dividend yield on a stock (both in a taxable account). You will get to keep more of your earnings from dividends than from the interest income. It is important to keep in mind that it doesn't really matter how much you earn on your investments. What matters is how much you keep.
For those of you who have all of your investments sheltered in an RRSP (or TFSA), this discussion does not really matter--all of your earnings are tax-free (and able to compound tax-free). If, however, you have your investments split between tax sheltered accounts and taxable accounts, you can maximize the money you keep by strategically placing certain types of investments in the RRSP, and leaving the rest in your taxable account. We'll look at an example of this tomorrow.
How does this relate to your investments? Investment income can be grouped into 3 basic categories:
- Interest
- Capital Gains
- Dividends
Capital gains tax is calculated by taking half of the taxable amount, and then applying your marginal tax rate. In other words, capital gains are taxed at half the rate of interest income.
Dividends are a bit trickier since there is a tax credit involved, but as you can see from the chart on TaxTips.ca, they are taxed generally at the lowest rate.
Keep in mind that income from foreign sources is generally taxed as regular income. The type of income--interest, capital gains, or dividends--does not matter for foreign sources. You may want to check for tax treaties with other countries to see if there are exceptions in your case.
I won't go through the exact rates or methods of calculation since they change from time to time, but you can see that some income is tax advantaged, and some (interest and foreign) is not. For example, suppose you could earn 3% interest income in a high interest savings account, or earn 3% dividend yield on a stock (both in a taxable account). You will get to keep more of your earnings from dividends than from the interest income. It is important to keep in mind that it doesn't really matter how much you earn on your investments. What matters is how much you keep.
For those of you who have all of your investments sheltered in an RRSP (or TFSA), this discussion does not really matter--all of your earnings are tax-free (and able to compound tax-free). If, however, you have your investments split between tax sheltered accounts and taxable accounts, you can maximize the money you keep by strategically placing certain types of investments in the RRSP, and leaving the rest in your taxable account. We'll look at an example of this tomorrow.
Monday, March 9, 2009
What Do You Do With Your Cash Savings?
There are many reasons to hold some amount of cash, and not put 100% of it into other investments. Emergency funds, and savings for near future purchases are examples.
Cash savings is one area where the rate that you earn makes all the difference. The products offered are for the most part very similar, so it really does pay to find the best rate of return possible.
My personal preference is for high interest savings accounts. For short term cash holdings, it's hard to beat their liquidity, principle protection, and CDIC coverage.
Let's consider some of the other options:
Aside from picking the highest interest rate, you want to also check out the history of that bank's relative rate versus the competition, in case you're just catching one that has adjusted its rate. You also want to consider how convenient it is to move money back and forth between it and your regular chequing account. Do you have to send cheques? Or can you do it over the internet? Finally, make sure you check for any fees they may charge.
If you decide to open a TFSA account at one of these institutions, also note that some banks are offering a different TFSA rate than their non-registered accounts.
I realize that opening a new account can be a hassle, but consider that once your account is open, you can use it for the rest of your life (or the life of the institution). If you can earn a guaranteed one or two percent more on your short term savings for the rest of your life, I think it's well worth the time you put in now to get that account opened.
So, what do you do with your cash savings?
Cash savings is one area where the rate that you earn makes all the difference. The products offered are for the most part very similar, so it really does pay to find the best rate of return possible.
My personal preference is for high interest savings accounts. For short term cash holdings, it's hard to beat their liquidity, principle protection, and CDIC coverage.
Let's consider some of the other options:
- Keeping it in your chequing or savings account at your bank: While letting cash sit in your account after your pay cheque is deposited may be the easiest option, and probably as safe as a high interest savings account (assuming you can resist the urge to spend it), moving money to a high interest savings account really only takes a few minutes on the internet, or over the phone. You'll earn many times more interest (in the range of 2 to 3 times more over a traditional big bank savings account) for your few minutes of work. Remember, the premium you earn over these accounts are guaranteed earnings. It's free money for a small amount of extra work.
- Money market mutual funds: This is a possible option, but it is not as liquid as a high interest savings account, and earns very close to what a high interest savings account would earn. If you choose this route, check for loads on the fund (you definitely want a no load fund for short term savings), and check for short term redemption penalties. Many funds also have minimum initial investment restrictions.
- Money market ETFs: For short term savings, the commissions you pay on a money market ETF will kill your return.
Aside from picking the highest interest rate, you want to also check out the history of that bank's relative rate versus the competition, in case you're just catching one that has adjusted its rate. You also want to consider how convenient it is to move money back and forth between it and your regular chequing account. Do you have to send cheques? Or can you do it over the internet? Finally, make sure you check for any fees they may charge.
If you decide to open a TFSA account at one of these institutions, also note that some banks are offering a different TFSA rate than their non-registered accounts.
I realize that opening a new account can be a hassle, but consider that once your account is open, you can use it for the rest of your life (or the life of the institution). If you can earn a guaranteed one or two percent more on your short term savings for the rest of your life, I think it's well worth the time you put in now to get that account opened.
So, what do you do with your cash savings?
Noise versus The Good Stuff
Financial information is coming at us from all directions these days. Some of it is great information that we can add to our knowledge and use for a long time and some of it is just daily noise: interesting, current, and required to fill the pages of outlets that need to sell news daily.
This blog is going to be mostly about useful information that you'll (hopefully) be able to use forever. However, there will also be some chatter about about current issues. To separate the two, I will tag all my posts as either "The Good Stuff", or "Noise". If you want just what I consider to be the calm, reasonable information, just search for the posts labeled "The Good Stuff".
This blog is going to be mostly about useful information that you'll (hopefully) be able to use forever. However, there will also be some chatter about about current issues. To separate the two, I will tag all my posts as either "The Good Stuff", or "Noise". If you want just what I consider to be the calm, reasonable information, just search for the posts labeled "The Good Stuff".
Welcome!
Welcome to the Canadian Money Blog!
This blog is for individual investors, savers or anyone with an interest in making better use of money. The focus is on intelligent and informed money decisions including cost control, knowing a product and its competition before making a purchase, knowing your own needs and purchasing patterns, and smart investing.
I am not a financial advisor, and financial issues are unique to each individual's situation, so please evaluate my opinions for yourself, or better yet, join in some discussion with me about my posts!
This blog is for individual investors, savers or anyone with an interest in making better use of money. The focus is on intelligent and informed money decisions including cost control, knowing a product and its competition before making a purchase, knowing your own needs and purchasing patterns, and smart investing.
I am not a financial advisor, and financial issues are unique to each individual's situation, so please evaluate my opinions for yourself, or better yet, join in some discussion with me about my posts!
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