The Manual Part 1

03 December 2016


This chapter was last updated on Dec 3, 2016.     The type is small due to the word press format. You can easliy copy, enlarge and paste it into a word document.

CHAPTER 1;  Rathgeber’s Retirement Planning Rules.

What follows are those “Retirement Planning Rules” (or “guidelines”) which I believe most middle-class Canadians should adopt as the rules of their own action plan to help them achieve a “successful retirement”. These rules/guidelines can be considered to be similar to legs on a stool. You do not necessarily “need” to have eight solid legs for a successful retirement; but the more legs you have, — and the more solid and sturdy they are, —  the better.

I didn’t invent any of these common-sense rules, but I have called them “Rathgeber’s Rules” because of the cool-sounding, repeating “R” alliteration; and because I have successfully built my family’s financial future on them.


Chapter 1.1;   Rathgeber’s Retirement Planning Rule #1;  Everyone Over 50 Should Make a “How-Much-is-Enough?” Retirement Plan.

Investors under 50 years of age can gloss-over or completely ignore this step; older investors should not.

When generating their retirement plan many (perhaps most) middle class Canadian couples with average dual incomes will probably find that they need at least a million dollars (and perhaps 2), unless they have good company pension plans, and especially if they want to retire before age 65.

To make a formal retirement plan you:

generate a set of valid retirement calculations;
and then review and update it from time to time.

Generating your “number(s)” and planned retirement date; and making an action plan of rules or guidelines to get there, are together, the essential parts of  “financial or retirement planning”. Whatever your definition of a “successful retirement”, you are unlikely to get there, without a good plan of budgeting and investing rules or guidelines, – started a good number of years or decades prior to retirement. These rules or guidelines — together with your nest-egg “How Much Is Enough” number and due-date, — become your formal “Retirement Plan”.  (If you also plan to leave a large inheritance to someone, or plan to help your kids with college, you might refer to your plan as a “financial plan,” rather than a “retirement plan”).

This is a fundamental step in retirement planning for all “life-veterans” who have passed their 50th birthday. Younger investors can gloss over (or skip) this rule; but seasoned Canadians should not.

Retirement planning often causes Canadians much anxiety, and is thought to be very daunting. It need not be. With the recent availability of good and free planning software, (see below) the task need not be overwhelming. If it becomes overwhelming, a good “fee-only” (not “fee-based”) financial planner can be hired from a web-search, or from the list on the MoneySense website, to generate a useful “How-Much-is Enough?” set of calculations, with a savings/RRSP contribution plan attached. Such fee-only planners will charge between $500 and $2000.

If you hope to use the services of your “free” advisor/seller, you are unlikely to get anything of real value from their “quick and dirty” one-or-two session attempts at generating a plan. Similarly, the five-minute questionnaires that are available on the Banks’ and Fund-sellers’ websites do not have a sufficient level of detail or sophistication to give you a reliable result either, — unless you are in your 30s or early 40s, and a mere “ballpark”# is sufficient for your purposes.

Otherwise, you need to spend a few hours (over at least a few sessions) on a good software program like the free one at, or with a fee-only financial planner. Appendix 1.1 contains a set of step-by-step instructions on how to use to generate a formal Plan.

Why is a formal Plan so important? Because only the uber-wealthy can retire confidently, — (or even have a goal retirement date), — without knowing that they are likely to have enough money for their definition of a “successful retirement” – (or at least for the “basics” or “necessities” of their planned retirement).  Even well before retirement, a formal Plan helps us properly analyze ongoing discretionary spending decisions – (such as, “Can we ‘afford’ a winter-sun-vacation and still stay on-track?”). Further still, investors approaching (or in) retirement need to know how much risk (and potential reward) they need to take with their investment choices to get, or stay “on-track”. (See Ch 3.1).

Lastly, retirement planning is a “process” that requires adjustment and updating every few years, as life throws us unexpected surprises.

Those inclined to do the job well should now consult Appendix 1.1 for a detailed set of instructions on how to make a Plan using the free software at, with whom I have no affiliation.


Chapter 1.2;  Rathgeber’s Retirement Planning Rule # 2,  Live Below your Earnings/ Pay Yourself First.

When generating their retirement plan many (perhaps most) middle class Canadian couples with average dual incomes will probably find that they need at least a million dollars (perhaps 2) unless they have good company pension plans, and especially if they want to retire before age 65.

With our slow growing economy and deteriorating demographics — (ie. low interest rates; the Baby Boomers retiring and cashing in their stocks; and our work-force growth slowing; and young people being highly indebted and not able to invest), all of which foretell that future stock market and bond returns will be lower than in the past 35 years – most middle-class Canadians need to save at least 1/10th of their net income in order to: maximize their RRSP contributions, and to achieve their other retirement priorities as set out below. Many Canadians will need to save more, perhaps 2/10ths, especially if they don’t have defined benefit pensions. This is what is meant by the often-repeated priciple of, “Paying yourself (your retirement fund/RRSP) first”. (How to calculate your own unique “How-Much-is-Enough-for-My-Retirement-Number” is the topic of the previous sub-chapter 1.1 and Appendix 1.1)

What follows are some sub-rules to help save for that bigger goal. If you need inspiration, I recommend reading  The Millionaire Next Door, or Rich Dad/ Poor Dad.  If you watch TV, I recommend Gail Vaz-Oxlade’s “Til Death Do Us Part”.

Most Canadians need to follow most of the following savings-rules to achieve a successful retirement:

Spending Plans/ Budgets.  To consistently “pay themselves first” most people need a budget — (even if it is as simplistic as a series of 3 -10 envelopes, or jars, containing cash, under various monthly categories, such as: “groceries”, “discretionary spending” etc).  And they need to stick to that budget, or “spending plan”.  Many “spending plans” or systems will “work,” as long as they are truely disciplined “systems” to which one dogmatically adheres. Never using your credit or debit card for anything but planned expenditures has a limiting effect on one’s consumer-impulse-buying tendencies. Many think that a cash-only mentality is “old-school,” but for me, it controls impulse spending,  –  especially at the end of the month when the bulge in my wallet isn’t what it formerly was. (And no matter how tempting that new guitar or golf-driver looks).

Home Equity/HELOCs. Living below your means also “prohibits”, to my way of thinking, using a Home Equity Line of Credit (HELOC), or any other “equity-take-out-loan”, for anything other than the purchase of an investment property, or for a short-term RRSP or TFSA loan.

Two-Year-Old (Gently-Used) Cars.   For many people, living below their means could be helped greatly by buying replacement cars that are at about two years old (rather than buying or leasing new cars that depreciate 33% upon leaving the car lot).

Principal Residence; (Don’t Be House-Poor). Buying a house is typically a great investment for most people, — (as long as they don’t plan too move frequently, and thereby lose their equity by paying real estate commissions too frequently).  An important rule is to purchase the type and style of house that still allows enough budget room for RRSP contributions, and extra mortgage pay-downs. When shopping for a house, the question shouldn’t be, “How much house can we afford?” Rather, it should be, “How much house can we afford without becoming so “house-poor” that we can’t maximize our RRSP payments and pay-down our mortgage early?

Remember also to plan for interest rates to increase at various cycles over the life of your mortgage. A 2-3% increase in your mortgage rate could easily add hundreds of dollars to your monthly payments. This is especially important in today’s lowest-in-a-generation interest rate environment, which will not last forever.

Another important money saving aspect of home-ownership is to be mortgage-smart when negotiating or renegotiating your mortgage (when your term is due at your present financial institution). See Chapter 1.4 below. Also, don’t buy the mortgage insurance offered by your bank; it is typically more expensive than term life insurance offered by an insurer.

Life Insurance.   Shop around for rates and/or use a broker who represents different insurers. Moreover, continually evaluate how much insurance your loved ones need. Far too many wealthy people, who are nearing or in retirement, still have a lot of “term” life insurance coverage; even though their kids are long-gone, and their spouse could easily “get by” on their present nest-egg, or at least with a reduced amount of coverage. For this class of middle-agers, the premiums are substantial, and ever-rising with age. Many of these policies could prudently be cancelled or reduced, even though your broker will cry. (Whole Life and Universal policies raise different issues, because many have an “investment” aspect attached, which will be lost upon cancellation of the policy, and which is one reason why the insurance industry invented these products of dubious quality).

Home and Auto Insurance. I believe that many middle-class Canadians would be better-served with higher deductibles (and the reduced premiums that accompany an increased deductible).  It costs nothing to ask your insurer how much your premium would be if your deductible were increased to the maximum. They will protest; but it’s your money and savings at issue  –  versus the unlikely event of a claim.  Another money-smart practice is to shop around for insurance and/or to use an independent insurance broker with access to many different insurers, deductibles and potential premium savings. Too many consumers don’t act like smart consumers when their insurance premium notice arrives in the mail. Shopping around makes sense, as does asking your broker whether your age, claim-free status, or mortgage-free status qualifies you for a discount. Many insurers and their TV ads imply that their “claims-handling” process is more consumer-friendly than their competition. However, that is BS.

More Money-Saving Ideas.   For other money saving ideas, I recommend Margot Bai’s book, Spend Smarter, Save Bigger, but please ignore her investment advice, which is poor.

RRSPs will be the topic of the next sub-chapter, because these plans form the cornerstone of most retirement plans.


Chapter 1.3;  Rathgeber’s Retirement Planning Rule #3;  Maximize Your RRSP Contributions, and Make Them Tax-Efficient

This, and the next 3 retirement “rules” are a hierarchy of investment “goals”, listed in the usual order of priority/importance for most middle-class Canadians, based on:  our taxation rules;  government grants;  and life-stage considerations.

Objective #1 is to maximize your RRSP.

RRSPs are investment “baskets” (or “vehicles”) in which you can own many different types of investment products, including: mutual and exchange-traded funds (ETFs), stocks, bonds, Guarenteed Investment Certificates or Term Deposits (GICs), etc.  Too many Canadians think that “buying an RRSP” –  (typically on the March 1st deadline) –  is the purchase of some type of specific product called “an RRSP.”  If they think about it at all, they typically think that they have bought something akin to a GIC;

If this is your present level of understanding, please read s-l-o-w-l-y, and keep this manual around for future reference).

Maximizing your allowable RRSP contributions, each and every year, is generally the best investment that most Canadians can make. This is because:
you get a tax deduction for the amount of your RRSP contribution, — (which is the equivalent of your government writing you a cheque for up to 48% of your contribution);
and also, because your RRSP investments compound, tax free, within the plan until you withdraw the funds.

This “tax-sheltering” is typically a bigger benefit than the tax deduction. Accordingly, most Canadians should “max-out” their RRSP contributions as their first investment priority:
ahead of all the priorities in the hierarchy below;
including paying down their mortgage;
(but they can take the tax refund cheque generated by their RRSP contribution and apply that to their mortgage).

(See your CRA Notice of Assessment from last year to see what your new contribution limit is). I encourage you to use that limit to the allowable maximum, and  thereby “pay yourself first”, especially if you don’t belong to a generous pension plan at work.

The only possible exceptions to the RRSP-first rule are:
select uber-wealthy persons;
members of uber-gold-plated-employer pensions, who can “better” use the money for other investments;
a few people in ultra-low tax brackets nearing retirement – if they are also poised to quickly jump to a much higher tax bracket;
and a precious few savy real estate investors, if they buy in select high-growth markets.

However, if one visits the financial planning section of a bookstore, they will see many dramatic and eye-catching titles, including those that discourage RRSP investing, “because” the money is taxable when it is withdrawn, sometimes but infrequently at a higher rate than when it was deposited. Only in extremely rare cases is it true that RRSPs are a “bad” investment based on tax rates; ie. — for a very few people in ultra-low tax brackets, nearing retirement, who are poised to quickly jump to the highest bracket. Very few people earn more in retirement than during their working years. Even where this does occur, the combined effect of the tax deduction, and years of tax-free compounding for many years, taken together, usually outweigh, (to a huge extent), the adverse impact of contributing in a lower tax bracket, and withdrawing in a higher bracket. 

Making your RRSP contributions tax-efficient means not only making the maximum payment every year, but also making your RRSP and that of your spouse “efficient” — so that all of your individual retirement assets (including the value of any business interests, and pension), will roughly be equal to those of your spouse. (A couple in exactly the same tax bracket will pay less combined income tax, by income-splitting, than two spouses in different brackets). It is true that income-splitting has become less important since 2006, when the Federal Government allowed “pension splitting” for spouses on their tax returns.  However, these pension splitting rules do not apply to RRSP withdrawals prior to Age 65. Therefore, if you plan to retire early, equalizing your retirement assets with those of your spouse is still important.

In practical terms, if the retirement assets of one marriage or common-law partner are greater than those of their spouse, — (and they are roughly the same age), –  the higher-income-earner should contribute to their spouse’s “spousal RRSP” to the extent necessary to equalize their total RRSPs and Pension. This means that the assets are held in the name of the contributor’s spouse, but the contributor gets the tax deduction.

The types of investments to buy in an RRSP are dealt with in significant detail in Chapters 3, 4, and 5 below, forming the main body of this manual.
The desirability of quickly paying down your mortgage is the next “rule” and chapter.


Chapter 1.4;   Rathgeber’s Retirement Rule #4; Pay Down your Mortgage (After your RRSP is Maxed Out), and/ Be Mortgage-Smart.

I don’t know of anyone who comfortably retired with a mortgage; moreover, getting rid of it as quickly as possible is important, in order to free up cash for other important “pay-yourself-first” priorities.

Most mortgages have some “open” features, such as:
the ability to pay down your mortgage faster than the bank’s planned amortization (repayment) schedule;
allowing you to pay an extra 10% (or 15 or 20%) of your outstanding balance once per calendar year;
and also allowing you to increase your monthly or weekly payments by 10, 15 or 20%.

Because of the reverse principle of the “magic” of compounding interest, making even modest “extra” payments can knock years off of your mortgage ball and chain. Spending an hour on a website under a search for “amortization tables” will, or should, leave a favorable impression on mortgage-payers looking to get ahead.

Most middle-class Canadians should focus upon paying down their mortgages after maximizing their RRSP contributions, – (perhaps by taking the tax refund generated by their RRSP contribution, and applying it against their Mortgage) — and before they contribute to a Tax Free Savings Account.

(I rank paying down your  mortgage behind maximizing your RRSP contributions, as a priority for most Canadians. Other “experts” say that mortgage pay-downs should take priority. The difference in philosophy results from expected rates of return in your RRSP. I rank RRSPs first because I believe that RRSP investments will achieve good rates of return. The truth is that both priorities are important).

Another related mortgage strategy is to pick as short an amortization/repayment period as possible each time your mortgage term comes up for renewal – typically after a year, or two, or five.

And upon receiving their renewal notice, most Canadians would benefit from hiring a mortgage broker to shop for the best possible rate; every quarter percentage point saved can either go into your pocket or RRSP, or allow you to shorten your amortization/repayment schedule.

An often repeated  principle is that “over the long term, you will typically achieve better interest rates (and save money) by always choosing variable interest rates, (or at least picking a short term)”.  This is true, but it assumes that if interest rates rise dramatically over the life of your mortgage term, that one’s budget allows them to absorb such a “hit”. Depending upon their financial circumstances and ability to sleep at night, the comfort of a 5-year-fixed-rate may be the right one for most tightly-budgeted-middle-class-Canadians. At a minimum, if you are considering “going variable,” ask your broker what your increased payment becomes if rates go up by 3%. And then make sure you can afford this. (This is known as “stress-testing” your budget”).

Some banks offer “blends” between a partly fixed mortgage, and a partly variable one, touted as “the best of both worlds.”  As attractive as this sounds, the real reason banks offer “blends” is to discourage comparison shopping, because the structures of the various banks’ blends vary enough that direct comparisons become difficult (but not impossible) to make. So if you want to “blend”, shop around and ask for the rates on each part of that blend.

Using these smart mortgage practices is part of the well known financial rule of “paying yourself first”.

As wonderful as is paying down your mortgage, many people with kids will also want to start an RESP for their kids, at the same time as they are working toward extra mortgage pay-downs.  That is the next rule, and sub-chapter.


Chapter 1.5;    Rathgeber’s Rule #5;  Contribute to a Family RESP Program If You Have Children Whom You Would Like To Assist in College.

In ten years, the cost of a four year post secondary program is anticipated to be over $100,000.00. Registered Educational Savings Plans (RESPs) can help.

are available from all financial institutions and brokerages that handle RRSPs;
can hold investments identical to those in a self-directed RRSP;
can be set-up as a self-directed “Family Plan,” so that if one of your children does not go to post secondary school, the RESP is still available for your other children;
and, allow for a partial matching grant from the federal government, (20% of what the parent contributes per year to a maximum of $500 per year).

Most Plans allow carry-forwards for years “missed”. The maximum total contribution is $50,000 per child, with the government grant being a maximum of $7200. (The rules are slightly less generous and complicated for years prior to 2007). The gains are never taxed if the RESP is used for educational expenses; and if your kids don’t go to post secondary school, you get your contributions back, (and pay tax on the gains). All in all, a good deal.

For types of products to buy, most Canadians are well-served by investing in RESPs exactly as they would invest in a self-directed RRSP. The available options are the main part of this self-help manual, discussed fully in Chapters 4 and 5.


Chapter 1.6;   Rathgeber’s Retirement Planning Rule #6;  Use a TFSA for major purchases, and retirement, after the above hierarchy of goals 1.3 to 1.5 has been achieved.

Since January 1, 2009 Canadians have been allowed to contribute $5,000.00 per year/per person to a Tax Free Savings Account (TFSA). For 2013, and onward, the limit is $5,500.00 per calendar year, to be adjusted for inflation.  The 2015 limit was $10,000, on a one year only basis.

are similar to an RRSP in the sense that your contributions can be invested in RRSP style investments;
allow for the tax-sheltering of income and gains on your investments, which will never be taxed;
allow you to carry-forward any unused contribution room for any years that you skip a contribution;
and allow for any withdrawals to be replaced, with one veryimportant rule  — if your TFSA is maxed out, you cannot replace withdrawals in the same calendar year. If you do, you will be taxed at 1% per calendar month, because this is viewed as an “over-contribution”.

All discount brokerages and financial institutions that offer RRSPs, also offer self-directed TFSAs.

TFSAs will be popular for Canadians saving for a down payment on their first homes, or to upgrade, and also for major purchases such as autos and RVs.
TFSAs can also be used to save for a retirement nest-egg. However, in general, most middle age Canadians would only use this after: their RRSP is maxed out; their mortgage is at zero; and their RESP is topped up sufficiently for the number of children they will have attending post secondary education. After these milestones are achieved, a TFSA is a good retirement vehicle.

For types of products to buy, most Canadians are well-served by investing in TFSAs exactly as they would invest in a self-directed RRSP. The available options are the main part of this self-help manual, discussed fully in Chapters 4 and 5.


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, but you should focus on buying equities in your non-registred accounts because of the tax implications.

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 are mortgage-free, you will find that your asset mix of stocks, equity funds (and/or ETFs), and Income generating investment such as 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 income investments  – (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 income investments would generally be better held in registered plan baskets. Tax can be confusing, but an accountant or fee only planner can help.

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 — houses for rental. 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, predict 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, and 2009 -2016 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, especially in Vancouver and Toronto.

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”.

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 meat and potatoes of all that follows in this manual.  If an investor can optimize their investment returns without undue risk, 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.

Furthermore, after reading this manual, I hope that you will no longer be a victim of  “Free advice” from 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 2.1;  The “Good” Discount Brokers

Investing wisely, through most of the strategies that follow, requires the services of a “good” deep discount broker.

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

The discount brokers thought to be best are: TD-Waterhouse, Q-Trade, Credential Direct, RBC Direct, BMO-Investoline,  CIBC Investor’s Edge, HSBC Invest Direct, and Scotia I-Trade.

Most of these brokerages are affiliated with the chartered banks, and you can open accounts at bank branches, but make sure that you don’t open an account suitable only for that particular bank’s own limited lineup of mutual funds. You want the “discount brokerage” arm of the bank, in order buy non-bank products.


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

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

1. Any 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)  “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.

(4)   “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).

(5)  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 hidden MER charges on Steroids).

(6)   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.

(7)   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).

(8)  Any equity mutual fund with an MER/hidden fee of over 2.00% 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 charge of any fund, use Funds- Fundselector- and click on the name of any fund chosen alphabetically, or by category). In fact, most investors should shun mutual funds altogether and get cheaper ETFs.

(9)   Variable Annuities with “possible upside dependant on the stock market” (sometimes called Guarenteed Minimum Withdrawal Benefit/GWMBs).   Any annuity with bells and whistles has hidden fees. (Plain old vanilla annuities are OK: see Appendix 6.3).

(10)  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. See the next Chapter 2.3 regarding advisors, and self-direction).

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

Free” advice is never  free.  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 internet 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 fee based investment counselors,” or “private wealth advisors” who charge a yearly fee based on a percentage of your assets.  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, — ( typically at least $10,000 per year) — and finding someone with whom you “click” is not a given. Lastly, even these people want to push bonds over GICs for the safe part of your portfolio, because bonds pay commissions and GICs do not. GICs pay better returns than bonds, especially when interest rates increase and bonds fall in value. Ditto for the new Robo-advisors who have recently hit the market offering low cost ETFs that are chosen for you and automatically rebalanced; if they offered GICs instead of Bond ETFs, they wouldn’t be a bad option for time strapped investors. See below, under Fixed Income Investing, for how Bond funds will lose money as interest rates rise. They may not rise much, but they can’t fall, and it is only falling rates which makes Bonds attractive over GICs.

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  “for free” is probably lying and collecting a secret commission that reduces your return, no matter what title they go by, and particularly if their firm advertises on TV).

A possible way around the self-interest/bias problem with the “free advice” sellers, is to use 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”, or on the MoneySense website.  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). The difference is confusing but important.

To summarize, most middle class Canadians cannot afford or find top notch advice through the traditional financial “planning” (selling) and banking community. And even the wealthy will get Bonds as opposed to better GICs.  Hence, the need for this self-help manual,  – 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 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 buying only the hidden-fee products that their banker or financial advisor/seller has for sale, together with his/her “free” advice.

Note that you do not need to confront your present broker, bank, or advisor to transfer your assets to a discount broker suitable for self-direction; 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,  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  — (income producing investments);

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

3     Building 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.