Straight Talk Investing

All chapters in the 38 page  manual have been featured over the fall and winter, and we will re-start on Sept 1. The complete manual is available for free in 4 parts on the sidebar. Have a good summer.

Chapter 4.4   Bonds (and Bond ETFs)

In “normal times” — (of interest rates between 4 and 10 percent) — if you want to optimize your income investments, (with medium risk of losses/mistakes) you will probably want some Bond investments together with, or optimally eventually replacing GICs. Government-issued Bonds typically pay a percentage point or two better than GICs, on a long-term basis, but with price fluctuations, and the risk of losses. But these are abnormal times with interest rates at once-in-a-generation-lows. Accordingly, I would wait until the Bank of Canada prime interest rate rises to at least 3% before buying any government bonds or Government Bond ETFs – (see below for the inverse relationship between interest rates and bond performance)..

Most government issued and top quality corporate Bonds are sold in denominations of $5,000 or $10,000. (Canada Savings Bonds are sold in low denominations, but pay a poor rate of return and should be avoided). Bond prices fluctuate up and down, (inversely with/opposite to, interest rates; see below).

Therefore, to prudently invest in Bonds directly, an investor should buy several bonds with staggered maturity dates:

– i.e. some mature in one year,

some in two years,

some in five, ten, etc.

This is called a bond “ladder”.

Buying corporate bonds –  (promises to re-pay by corporations) — carries some risk of default, but Government Bonds are completely safe from default, but still fluctuate oppsoite to interest rate changes.

Bonds can be bought through all discount brokerages. Prices of longer-term Bonds, (maturing in 5-10 or more years), fluctuate significantly, and inversely with/opposite to interest rates; (as interest rates go up, Bond prices go down, and vice versa). Short term Bond prices fluctuate less with interest rates than Long term bonds. A rough rule of thumb is that short-term bonds can fall in value by 3% for every 1% rise in interest rates; long term bonds can fall in value by 8% for every 1% rise in prevailing interest rates. (A more precise rule of thumb is to analyze the duration of “years to maturity” of your bonds (or your bond funds); and to take the duration in years, and multiply that by the rise in interest rates; for eg. a bond with a duration of 10 years will fall 10% for every 1%  spike in prevailing rates. A 5 yr duration = 5% loss, for every 1% rate spike, etc).

This is why I would not presently buy any new government bonds or ETFs until the Bank of Canada prime rate rises to at least 3%, from its present lowest-in-a-generation level.

Moreover, the price fluctuations in bonds means that most middle-class investors will not have a sufficient portfolio to buy a properly diversified ladder or basket of individual bonds directly. Therefore, they should buy both a short-duration and a long-duration government Bond ETF, and a corporate bond ETF –  (Exchange Traded Funds are a cousin to Mutual Funds)  –   and they should do so s-l-o-w-l-y, over a time period of 5 years –  (see below). Bond ETFs are much better than Bond Mutual Funds. With one exception set out below, nobody but advisor/sellers recommend that you buy Bond Mutual Funds, because they carry a hidden Management Expense (MER) of up to 2% per year, which kills the returns. Bond ETFs are better, and have much lower MERs.  ETFs are a cousin to mutual funds, in which the fund manager does not try to buy “good”  bonds, but merely mimics one of the various Indices (a basket of bonds), and therefore the hidden MER is lessened. You can buy ETFs through your discount brokerage account. However, the relative ease of buying Bond ETFs does not mean that you should rush out and take a big position in Bond ETFs (or even a bond ladder) all at once. You need to always remember that Bonds and Bond ETFs fluctuate in value as interest rates fluctuate, — (especially long-term bonds; see above) — and therefore you should get into a bond ETF portfolio,  only after the Bank of Canada rate is at least 3%, and even then do so:

s-l-o-w-l-y,

in roughly equal incremental installments over period of 5 years,

leaving the balance of your money earmarked for bonds in GICs, or in a money market fund until you slowly build up your bond ETF portfolio.

This is especially important in times of low interest rates, because when rates rise, bond prices fall, — (see above for how much).  That said, after you have your bond ladder in place, you should be able to leave it alone for a very, very long time.

Over the long term your bond portfolio should pay an average rate of return of something like 5 – 8%, but it will fluctuate over the short term. You also need to know that you pay commissions on ETFs of about 5 cents per share, when you buy and sell (unless you have $100,000 or more in a discount brokerage, and qualify for $5  – $9.99 trading commissions;  See Ch 2.1 for a list of good discount brokers). But if you hold your ETFs for a long period of time, (as you should), your commission costs will be more than off-set by the MERs saved, in comparison to Bond Mutual Funds.

My StraightTalkInvesting.ca Newsletter contains recommendations for when and which bond ETFs to buy and sell, including the tricky selection of corporate bonds and high-yield corporate bonds.

Again, if you are intimidated by the nuances of bond investing, and the possibility of losses and mistakes, GICs are a safe alternative which will pay a percentage point or two less over time. Also remember again to build your bond portfolio, slowly, over a 5 year period, and to avoid government  bonds altogether until our prime rate rises to at least 4%.

Chapter 4.3  Hierarchy of Income investing risk and reward; GICs, Government-issued Bonds, (including ETFs),  Mortgage Pools, Corporate Bonds,  High-Yield Shares, and Preferred Shares

There is no increased potential reward in the investment world, without an increased accompanying risk. The Income seeking investments listed in the Chapter Heading are best considered on a risk/reward continuum starting with the least risky and rewarding category, and ending with the most risky and rewarding.

GICs historically have paid 2-5%, and are the least risky investment available, and are the easiest to monitor and maintain, in the sense that you do not need to build a portfolio slowly. (See Ch 4.2 above). GICs provide the closest thing to mistake-free investing. However, government bonds can be expected to pay a percentage point or two higher than GICs on a long term basis, (historically 6-8%) but carry a bit more risk, and prices (and losses) vary inversely with interest rates – see below. MICs (Mortgage Pools) have paid considerably better, (8-12%) but carry more risk yet, though typically not as much as equities. Corporate Bonds (issued by corporations have differing levels of risk depending on the issuer, but carry about the same risk as MICs. Prefereed Shares and high yielding stocks like Real Estate Investment Trusts are technically not pure income investments and carry the most risk and potential reward.

Chapter 4.1  Fixed Income Investing General Principles

When thinking about fixed income investments, you should think about buying and holding your investments for several years.  FI investing is “buy and hold” investing exemplified.

Whatever investments you pick, please do not be fooled into buying any:

   Bond mutual funds,

   Balanced Mutual Funds,

   Wrap accounts,
   
   Segregated Funds,

   Equity-linked Notes, or Principal Protected Notes, all of which contain high, hidden, performance-killing fees. (See Ch 2.2 above).

   Annuities with bells and whistles that offer “upside potential”, or “re-sets” (GWMBs); that said, for unsophisticated investors, plain-old vanilla annuities can form all or a part of a fixed income portfolio, but they pay a poor rate of return to anyone who does not live to at least age 90. (See Appendix 6.3).

Chapter 4.2;  GIC Investing, The Super Simple Fixed Income System

If you are an investor who likes to keep things real simple, FI investing can be as simple as asking your discount broker (or GIC broker) to:

   invest you in equal amounts of the best available (highest-interest-rate) 1 year, 3 year, and 5 year GICs (Guaranteed Investment Certificates, sometimes also called “term-deposits”):

   then as these GICs mature, simply keep reinvesting in the best available 5 year GICs.

GICs are the least risky investment available, and are the easiest to buy and monitor. These investments are almost mistake proof.

The long term expected rate of returns from GIC’s is about 2-5%, slightly lower than bonds (by about 2 %), but to many investors who like to keep things simple, (and mistake-free), this is perfectly acceptable, and better than suffering with “balanced” or bond funds with their high, hidden, performance-killing fees.

GIC rates vary widely, so you should ask your discount broker to quote you the best rates. (You can probably get an extra quarter point in your returns by using a dedicated deposit broker such as GICbroker.com, especially if you have more than $50,000 to invest).

Also, remember to keep your GICs from any one financial institution below the $100,000.00 insured level. (That is, even though Credit Union “A” offers the best rate, you should also buy from Credit Union “B” if you would otherwise have more than $100,000 with “A”).

If you are “keeping-it-simple” as a GIC-only investor, you can perhaps skip or skim almost all of the information in this Chapter on other FI products, but I encourage you to read on, in order to achieve better success. 

FI alternatives are best considered in a continuum (or hierarchy) of risk/reward, starting from least risky GICs.  Next along the risk continuum are Bonds, followed by Mortgage Pools.

Chapter 3.1;  Determine your own unique Risk Tolerance, and make it the driver of your asset allocation/mix, between riskier and less risky investments.

The fundamental question to ask oneself before considering any particular investment product or strategy is, “How Much of My Family’s Nest Egg should be invested in each of:

less risky assets such as Fixed Income;

Equities, (which have more risk of losses)?

The “problem” with taking no risks (of losses) with your investments, is that loss-risk-free investments all pay minimal interest, which may not (or just barely) keep up with future anticipated inflation. Only the uber-wealthy can afford to earn a rate of return less than (or just above) inflation, and still meet their future-inflated-dollar-needs, many years down the road of life. (For example, a car that today costs $40,000 will likely cost $80,000 in 20 or 25 years; and earning a low return will then not buy a replacement vehicle). This is called “inflation-risk”. The best way to illustrate this is to spend a round or two on retirementadvisor.ca, with “inputs” of  “expected rates of return” equal-to, or just higher than “inflation.” (See Appendix 1.1).

The bottom-line is that most of us cannot simply invest only in ultra-safe investments such as Guaranteed Investment Certificates (GICs, sometimes also called “term-deposits”). How much, or little risk you can tolerate, and still achieve your retirement goals, is the subject of the next few sub-Chapters.

Sadly, I know of no way of as achieving above-average investment rates of return without taking on the risk that your investments could fall in value from time-to-time, and perhaps forever. Anyone who talks of “superior returns without risk” is either a liar or a fool. To achieve double-digit returns, investors typically need to invest in real estate, or equities  –  either directly, –  (by buying the stocks of companies listed on stock exchanges), — or indirectly, through mutual funds, or Exchange-traded funds (ETFs), — (through which the investor indirectly invest in many stocks with a pool of several other investors).

Most Canadians do not have the temperament for investing in revenue real estate; and accordingly, the remainder of this manual ignores this attractive asset class, except for Appendix 1.7. We will accordingly differentiate primarily between fixed income investing, and equity investing, as we go forward.

Equities, considered from high-overhead, tend to move in price-cycles between:

longer growth period swings (up or bull markets);

and short and sharp unexpected busts (corrections, or bear markets).

Because: (1) there is, sadly, no “Stock-Market-Forecaster’s-Hall-of-Fame” (or even a set of reliable tools for accurately forecasting large scale equity market drops); and, (2) because most forms of portfolio insurance are too expensive and time-consuming for the average Canadian with a job or life — most investors will only be able to sleep at night if they do not have all of their assets invested in equities or equity funds.

Accordingly, most investors should only invest a portion of their nest egg into equities and equity funds. A big chunk of most Canadians’ nest eggs should be invested in fixed income products such as:

GICs,

Bonds or Bond ETFs,

and Mortgage Pools (MICs).

Why? Although most sensible investors believe that equities will generally rise in value for the foreseeable future, we could be wrong. (See Ch 5.1).

Accordingly, prudence requires that most of us should be diversified between different types of investments; — some with the risk of a drop, but larger possible gains; — some with low risk, and lower potential reward. Only young investors (40 or youger), or investors comfortable with a lot of risk should have an asset mix which is primarily invested in equities. This is true even for investors following the proven strategies set forth in the Equity Strategies Chapter 5.  Most older investors will want to be more conservative, and invest mostly in Fixed Income products, because a large stock market melt-down on the eve of, or just into retirement can be particularly devastating to a retirement projection. Here is an example – if we have a stock market catastrophe and most stock markets plunge by 30%, but you have only half of your assets in the stock market, –  and half in fixed income, — your loss is a “manageable” 15%.  It hurts, but it is probably not life changing like a 30% loss.  A 30% loss on the eve of, or just into retirement is particularly devastating, because you will run out of time to recover from your losses.  Such losses are rare but do happen, as they did in the fall of 2008. So, you, like me, should have some fixed income investments, so that not all of your nest-eggs are in one basket of equities that could drop and become completely scrambled. Younger investors can usually be more aggressive in their asset mix than older investors, because they will have more time to recover from any really bad equity meltdowns.

I can’t tell you what percentage of your assets should be in higher risk/reward equities; nor can a financial planner or advisor. They can coach you, but you need to come to this conclusion yourself.

Many financial planners boldly state that:

“the equities’ percentage of your portfolio should be 100 minus your age,

and conversely, that “the fixed income percentage should be your age”.

I like and use that “age rule” for me, but it is just a rough “rule of thumb” for you to consider. The answer for you — (your risk/reward tolerance) — is as individual as your shoe size. The important factors to consider are whether you can sleep at night with your investment mix, and whether you could recover from a worst case scenario with equities – i.e. a sudden 30 +% drop like many investors suffered in 1987 and 2008.

Another main consideration is the extent to which you need your investments to grow in order to fund your retirement needs. For help with this, readers should consult Ch 1.1and/or Appendix 1.1 (Retirementadvisor.ca), and give themselves an hour to work with various rates of return, and various levels of post retirement spending needs.  If your projection is that 3% GICs will be sufficient to fund a good retirement without running out of savings, you could devote only a small percentage of your nest egg to equities, — (perhaps zero) – and assume almost no risk of losses. If you need 6% returns or better, you need a good proportion of equities, with the risk that accompanies it.

The risk tolerance/asset mix appropriate for you will only be “finalized” after some trial and error, and should become more conservative as you advance in age. This is more about your comfort level, and ability to sleep, after and during significant equity market melt-downs, than it is about doing what others your age are doing.

Most folks over-estimate their tolerance for risk during bull (up) equity markets. Conversely, the pendulum tends to swing too-far-back in over-reaction during bear (down) periods. The best advice is to gauge your feelings during neutral and slightly negative equity phases, and if you are comfortable during those cycles, to go with that asset mix between equities and Fixed Income, while tending more towards FI as you age. If in doubt where to start your search for the level of risk right for you, use the “age-rule” noted above. After some trial and error, I came to use it myself.

Because Fixed Income investments should be a feature of almost everyone’s nest-egg, the next full Chapter (4) deals extensively with FI. The Chapter after that deals with equity investing strategies, and independent support systems available to self-directed equity investors. But the next sub-chapter (3.2) deals with tax implications for those that have both registered and unregistered assets. If this applies to you please read it and analyze your own portfolio carefully.
Otherwise, you can conveniently ignore it.

Chapter 2.3; Invest Wisely by considering self-direction, or at least avoiding  planner/sellers and advisor/sellers, especially those whose firms advertise on TV.

See the “Rules” above in Chapter 2.2 for the crappy products not to buy.

These are usually sold by the several different classes of:

“financial advisors”

“financial planners”

and “investment advisors”

whose job it is to earn a living through commissions earned from the products they sell, either for their own account or that of the bank or firm for whom they work. These folks come with many different titles, and most have some type of competency designation, such as “Certified Financial Planner”, which is merely a knowledge-competency designation, not a guarantee that they can rise above the self-interest and bias tempting them to sell you a well-paying product, (often with a fee that is hidden). Some future saints have the moral and ethical code that allows them to rise above self-interest, and high hidden commissions, — (and I have met a few) – but, sadly, you need to treat the vast majority of these product and fund sellers as you would car and appliance salesmen. Horror stories abound, and this is why so many Canadians are now becoming competent to self-direct their own investment lives; it is also why the blogs that encourage self-direction are exploding in number and popularity.

Again, there are exceptions, but quality advisors are hard to find unless you have a portfolio of over a million dollars. Wealth allows you to qualify for the generally better help offered by “true-high-net-worth investment counselors,” or “private wealth advisors.”  In my experience, these advisors generally do give unbiased and good advice, –   (and asset management without your active involvement, and often good retirement plans).   But these firms charge fees of 1-2% of your assets, per year, — (at least $10,000 per year) — and finding someone with whom you “click” is not a given.

Again, unless your portfolio exceeds at least a million dollars, these firms won’t take you on, and for me, $10,000-plus, per-year, is too pricey. These true high-wealth counselor-firms typically do not advertise. (Anyone else offering these “same services” to lesser account holders is probably lying, no matter what title they go by, and particularly if their firm advertises on TV).

I know there are also some scrupulous “fee-based” advisor/sellers — (especially true high net worth counselors) — but, again, they are hard to find.

A possible way around the self-interest/bias problem with the fee-based/sellers, is to consider using the services of a “fee-only” financial planner – (one who charges by the hour, often $350 or more, and who has no products to sell). These folks are especially useful for coaching you in drawing up a financial-retirement plan. They will typically not, however, recommend specific investment products, and this limits their usefulness to most investors. Moreover, these planners are rare and hard to find. If you are interested, you can find “fee-only” planners through an internet search for “fee-only financial planners.” But carefully question anyone whom you interview to ensure that they are truly “fee-only,” as opposed to “fee-based” (who also sell investments; see above).

To summarize, most middle class Canadians cannot afford or find top notch advice through the traditional financial “planning” (selling) and banking community. Hence, the need for this self-help manual,  –  (and some recommended sources of independent support) — to assist middle class Canadians who wish to “go-self-directed”/or “DIY — Do It Yourself”.

Again, one underlying plank of this manual is that I believe that, with a modest amount of self education, (this manual), and between a few minutes and a few hours per year to spend on their investments, most investors with average intelligence, common sense, and a good B.S.-detector, can invest very successfully — as a part of the growing legion of Self-Directed Investors in Canada. These are investors who have rid themselves of the conflicts of interest inherent in buying only what their banker or financial advisor/seller has for sale, together with his/her “free” or “fee-based” advice.

Note that you do not need to confront your present broker, bank, or advisor to transfer your assets to another broker; your new discount broker will fill in all of the forms on your behalf and send them to your former advisor or bank; (Ch 2.1 for a list).

This self-help manual is intended to help self-directed investors, by summarily sifting through the pros and cons of a handful of self-directed strategies and products suitable for the most common classes of investor-types, so that any particular investor can come to useful conclusions in crafting an overall investment strategy, suitable to the amount of risk they wish to tolerate, with a reasonable amount of time allotted for portfolio maintenance. This manual will also recommend some good independent support services to utilize for ongoing assistance with the equity part of a self-directed nest-egg. (The ongoing time commitment required for all strategies will be clearly estimated; because it ought to be one of the main factors to be considered by any particular investor).

The last 3 main topics involved in “investing wisely” are:

1     Determining your unique tolerance for risk, and how that will probably change over time, (because that “drives” your asset mix between more risky assets (equities) and safer/lower risk assets  — (fixed income);

2    Crafting a low risk (fixed income) portfolio strategy based on your risk-tolerance, and

3     Possibly crafting an equity portfolio strategy (or strategies), based on your risk tolerance, and obtaining the necessary independent support to do so prudently.

These are extensive topics, and will be discussed as the next several chapters and sub-chapters.

Chapter 2.3; Invest Wisely by considering self-direction, or at least avoiding  planner/sellers and advisor/sellers, especially those whose firms advertise on TV.

See the “Rules” above in Chapter 2.2 for the crappy products not to buy.

These are usually sold by the several different classes of:

“financial advisors”

“financial planners”

and “investment advisors”

whose job it is to earn a living through commissions earned from the products they sell, either for their own account or that of the bank or firm for whom they work. These folks come with many different titles, and most have some type of competency designation, such as “Certified Financial Planner”, which is merely a knowledge-competency designation, not a guarantee that they can rise above the self-interest and bias tempting them to sell you a well-paying product, (often with a fee that is hidden). Some future saints have the moral and ethical code that allows them to rise above self-interest, and high hidden commissions, — (and I have met a few) – but, sadly, you need to treat the vast majority of these product and fund sellers as you would car and appliance salesmen. Horror stories abound, and this is why so many Canadians are now becoming competent to self-direct their own investment lives; it is also why the blogs that encourage self-direction are exploding in number and popularity.

Again, there are exceptions, but quality advisors are hard to find unless you have a portfolio of over a million dollars. Wealth allows you to qualify for the generally better help offered by “true-high-net-worth investment counselors,” or “private wealth advisors.”  In my experience, these advisors generally do give unbiased and good advice, –   (and asset management without your active involvement, and often good retirement plans).   But these firms charge fees of 1-2% of your assets, per year, — (at least $10,000 per year) — and finding someone with whom you “click” is not a given.

Again, unless your portfolio exceeds at least a million dollars, these firms won’t take you on, and for me, $10,000-plus, per-year, is too pricey. These true high-wealth counselor-firms typically do not advertise. (Anyone else offering these “same services” to lesser account holders is probably lying, no matter what title they go by, and particularly if their firm advertises on TV).

I know there are also some scrupulous “fee-based” advisor/sellers — (especially true high net worth counselors) — but, again, they are hard to find.

A possible way around the self-interest/bias problem with the fee-based/sellers, is to consider using the services of a “fee-only” financial planner – (one who charges by the hour, often $350 or more, and who has no products to sell). These folks are especially useful for coaching you in drawing up a financial-retirement plan. They will typically not, however, recommend specific investment products, and this limits their usefulness to most investors. Moreover, these planners are rare and hard to find. If you are interested, you can find “fee-only” planners through an internet search for “fee-only financial planners.” But carefully question anyone whom you interview to ensure that they are truly “fee-only,” as opposed to “fee-based” (who also sell investments; see above).

To summarize, most middle class Canadians cannot afford or find top notch advice through the traditional financial “planning” (selling) and banking community. Hence, the need for this self-help manual,  –  (and some recommended sources of independent support) — to assist middle class Canadians who wish to “go-self-directed”/or “DIY — Do It Yourself”.

Again, one underlying plank of this manual is that I believe that, with a modest amount of self education, (this manual), and between a few minutes and a few hours per year to spend on their investments, most investors with average intelligence, common sense, and a good B.S.-detector, can invest very successfully — as a part of the growing legion of Self-Directed Investors in Canada. These are investors who have rid themselves of the conflicts of interest inherent in buying only what their banker or financial advisor/seller has for sale, together with his/her “free” or “fee-based” advice.

Note that you do not need to confront your present broker, bank, or advisor to transfer your assets to another broker; your new discount broker will fill in all of the forms on your behalf and send them to your former advisor or bank; (Ch 2.1 for a list).

This self-help manual is intended to help self-directed investors, by summarily sifting through the pros and cons of a handful of self-directed strategies and products suitable for the most common classes of investor-types, so that any particular investor can come to useful conclusions in crafting an overall investment strategy, suitable to the amount of risk they wish to tolerate, with a reasonable amount of time allotted for portfolio maintenance. This manual will also recommend some good independent support services to utilize for ongoing assistance with the equity part of a self-directed nest-egg. (The ongoing time commitment required for all strategies will be clearly estimated; because it ought to be one of the main factors to be considered by any particular investor).

The last 3 main topics involved in “investing wisely” are:

1     Determining your unique tolerance for risk, and how that will probably change over time, (because that “drives” your asset mix between more risky assets (equities) and safer/lower risk assets  — (fixed income);

2    Crafting a low risk (fixed income) portfolio strategy based on your risk-tolerance, and

3     Possibly crafting an equity portfolio strategy (or strategies), based on your risk tolerance, and obtaining the necessary independent support to do so prudently.

These are extensive topics, and will be discussed as the next several chapters and sub-chapters.

Chapter 2.2  Invest Wisely, — Don’t Buy Any Crap.

The rest of this manual is about investing “wisely”, according to your unique tolerance for risk  –  (which this manual will help you define). This Chapter summarily warns you to stay away from products which are of dubious benefit to most Canadians, –  typically because they contain unjustifiably high but hidden charges, paid indirectly by investors to their advisor/sellers.

1. Any product or mutual fund sold with either; (1) an upfront commission (or “load”);  or,  (2) a deferred sales commission/charge (DSC or “rear load”), which declines over time if the investment is held sufficiently long by you — (usually 5 or 7 years); or (3), any product with a charge that smells like any type of commission. The financial products-industry continually invents new and harmless-sounding names for this crap; but if it stinks, avoid it. No mutual fund or product justifies anyone paying any such commission in this day and age of discount brokers and no-load funds.

2.  “Balanced” or Bond mutual funds, almost all of which contain a stupidly-high hidden MER (management expense ratio) fee, from which you indirectly pay your advisor a hidden secret yearly fee, and which also pays for TV ads. (There is one possible exception for a high yield bond fund listed in Ch 4.4(a)).

3. “Wraps” or “wrapped or bundled” sets of products, all of which contain stupidly high hidden MERs, and other hidden fees on top of the MERs. (MERS on steroids).

4. Segregated or “seg” funds sold by insurers as good for your beneficiaries if you die. The benefits to your survivors are typically extremely expensive to you in a sneaky and hidden way. (More MERs on Steroids).

5. Equity-linked or Principal-protected Notes, or anything with a similar name or concept. These are sold as an extremely expensive guarantee that your equities won’t go down at the end of a long period of time, often 10 years. The probability of a 10 year negative equity market is low, and this type of product doesn’t usually give you the full benefit of rising stock markets. Hidden fees and complicated pay-back formulas are also too often part of these “notes”. Accordingly, the vast majority of investors would be better-served by having a diversified portfolio between safe and riskier products, than by buying this very expensive risk protection/insurance.

6. Universal or Whole life insurance policies, almost all of which are claimed, wrongly, to contain an outstanding investment component, and most of which are too complicated for almost anyone to understand. Most Canadians are better served with plain old vanilla term insurance, and a series of easily-understood and transparent investments suited to their individual risk tolerance. (Think twice, however, about cancelling any policies that have been in place for a long time).

7.  Any equity mutual fund with an MER/hidden fee of over 2.25% per year. With the new advent of cheaper Exchange-Traded funds (ETFs), it will be a rare mutual fund that justifies such a stupidly-high hidden annual fee. (To find the hidden MER of any fund use GlobeInvestor.com.- Funds- Fundselector- and click on the name of any fund chosen alphabetically, or by category).

8.  Variable Annuities with “possible upside dependant on the stock market” (Guarenteed Minimum Withdrawal Benefit/GWMBs). Any annuity with bells and whistles has hidden fees. (Plain old vanilla annuities are OK, for those retirees with limited investment expertise: see Appendix 6.3).

9. Any product advertised on TV, or any product from anyone whose firm advertises on TV, (with the notable exception of Bank-affiliated Discount brokerages, which are OK).  “Someone” pays for these ads, and that some-“one” is you, typically in the form of high/hidden/performance-killing annual fees.

Chapter 1.8  Rathgeber’s Retirement Planning Rule #8,  Invest “Wisely”.

This is perhaps not really a sub-rule at all, but is really the essence of all that follows in this manual.  If an investor can optimize their investment returns without “undue risk”, – (defined according to their unique perspective alone) — they will do amazingly better than their neighbors. Achieving an “extra” 2 or 3 % return per year will make a huge impact upon the eventual size of your nest-egg, because of the “magic” of compounding interest, especially in a “registered” tax-free holding-vehicle such as an RRSP, RRIF, RESP, or TFSA.

Please do not be fooled by a TV ad, or a commissioned salesperson into believing that “easy-decision” investments are “just as good as any other investments”, or that they are “safer/less risky” than most other products.

After reading this manual, I hope that you will no longer be a victim of  financial “advisor”/sellers or bankers collecting hidden fees for little or no work on your behalf; and that you will no longer buy any: “Balanced” Funds, Bond Mutual funds, Seg-funds, Wrap or Bundle products, Bank sponsored Fund-Family-Programs, Principal Protected Notes, Equity-linked notes, Whole or Universal Life Insurance, Variable Annuities (GWMBs), or other investments of dubious value, all of which are designed to make your Bank and/or your advisor or Bank rich, at your expense.

Please read on, for how to invest wisely, which is the main focus of the rest of this self-help manual.

Chapter 1.7   Rathgeber’s Retirement Planning Rule # 7;  Invest in Unregistered Investments, including revenue-real estate, after all your registered plans are maxed-out, and your mortgage is at zero.

If you are in this enviable position of having both: maximized your registered accounts (RRSP, RESP, TFSA); and paid off your mortgage in full, you are very likely well on the road to a sound retirement. It is then time to consider non-registered investments. But if your RRSP/RESP and TFSAs are not maxed-out, and your mortgage is not at zero, you should typically concentrate on those first, and skip this chapter.

When investing in non-registered assets, you have the same full range of investments and strategies available to you, as you do for your registered accounts, and a few others such as:
preferred shares;
dividend achievers;
and revenue-producing real estate.

Tax Implications. You only need to worry about this if your RRSP/RESP/TFSAs are at the max, and your mortgage is at zero. If not, you can skip this chapter. If you are maxxed out on your registered investments and without a mortgage, you will find that your asset mix of stocks, equity funds (and/or ETFs), bonds (and bond ETFs), and GICs should differ somewhat between your registered and non-registered accounts, to take into account the different after-tax treatment of assets in an unregistered account. For example, even a person that wants to have a 50 -50 allocation between equities and fixed income — (the important considerations for which are discussed later in Ch 3.1) — might well find that it is tax-advantageous to hold a disproportionate portion (or all) of their equities (or equity funds/ETFs) outside of their registered accounts, in whole or in part, to take advantage of the capital gains tax-treatment of equities and the dividend tax credit. The flip side of the coin is that a disproportionate value of a person’s fixed income investments would generally be better held in registered plan baskets. More discussion follows on this point in Chapter 3.2.

Preferred Shares and Dividend Achievers.  Because of the dividend tax credit, these types of investments are typically held outside of registered accounts. See Chapter 4.6 (and Appendix 4.6) and Ch 5.7 to determine if these are right for you, together with the types of investments which you hold in registered accounts.

Revenue Real Estate. After the above hierarchy of investment goals have been maxed-out, — (or even before), — one can also consider investing in revenue-generating real estate. The merits and drawbacks of investing in revenue-producing-real-estate are too big a topic for this manual, and are not likely to be practiced by more than a very smart minority of investors.

Real estate investing in Canadian provinces west of Quebec has generally been a good investment for several decades, for me, and for many or most others who have “taken the plunge” depending upon: the location, the purchase price, mortgage rates, rental rates, and in particular, whether one has the temperament for the hassles of being a Landlord.

The main advantage of Real Estate is that it represents a conservative use of “leverage,” whereby the investor’s capital gains can be “magnified” through the use of borrowed money. For a good example, see the Appendix to Ch 1.7 at the end of this manual. Even with the coming demographic/greying Baby-boom phenomenon, most forecasts for household-formation, and the number of required homes in most areas of Ontario, Sask, Alberta and BC, forecast that real estate will generally continue to be a sound investment for decades to come. That said, the glory years of price appreciation between 2004 and 2008 are probably well behind us. Moreover, Canadian residential real estate is now thought by many to be too expensive by international yardsticks, measured as a ratio of prices to rents, and family income to prices.

For a concise listing of the pros and cons of revenue-realty-investing, and a source-guide for more information and wisdom, see the Appendix to Chapter 1.7, at the conclusion of this manual.

The next Chapter starts into the real meat and potatoes of this self-help manual, which is, “Investing Wisely”.