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FEBRUARY 2016

Irrational Investing - Why Good People Make Bad Investment Choices Matt Poyner P.9

21 Ways To Reduce Investment Management Fees Warren MacKenzie P.14

BEATING theTSX

2015/2016 Annual Update

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Ross Grant P.6

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FEBRUARY 2016, Volume 35, Number 5

REGULAR FEATURES Shareclubs 4

Sharing With You 4

Dividend & Company News 5

Model ETF Portfolio 5

Coming Events 22

Money Digest 36

Canadian DRIPs with SPPs 37

Ask The Experts 38

Top Funds 40

Canadian ETFs 42

FEBRUARY 2016SPECIAL FEATURES

BTSX – 2015/2016 Annual Update Ross Grant 6

Irrational Investing- Why Good People Make Bad Investment Choices Matt Poyner 9

Is Silver Worth A Play During The Commodity Rout? Philip MacKellar and Benj Gallander 12

21 Ways To Reduce Investment Management Fees Warren MacKenzie 14

Is It Time To Buy Commodities? Andrew Hepburn 17

Are My Investment Advisor’s Cookie Cutter Asset Mix Recommendations Hurting My Performance? Peter McMurtry, CFA 19

Why Your Brain May Not Be Helping You Make The Best Decisions Alan MacDonald 21

Will That Be “Buy”, “Sell” Or “Hold”? Bill Carrigan 23

The Contented Investor Hedley Dimock 27

Mortgage Tips For Buying Investment Properties

Anson Martin 31

US Voluntary Disclosure Program Updated

Ed Arbuckle 33

Is Bigger Really Better? Leasing the Right Size and Shape of Commercial Space JeffGrandfieldandDaleWillerton–TheLeaseCoach35

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Peter HodsonThursday, March 3 • 3:15 pm – 4:00 pm

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I don’t know about you, but I am starting to feel like Bill Murray in that

great movie, Groundhog Day. After all, it is February, and, well, I always thought February 2nd should be a Holiday.

Every day I wake up, there is another problem in the stock market or the world. China has devalued its currency (again). China has halted trading (again). Oil has declined (again). The market has dropped (again). Metals prices are plunging (again). The Canadian dollar has dropped (again). Terrorists have struck (again).

I remember, as a portfolio manager in October 2008, describing my day-to-day work experience to friends. The market was dropping 5%, 6% or more per day, and I used this analogy: ‘well, it’s like going to work each day, and then someone (in this case the market) hits you over the head with a shovel for 10 hours, and then you go home’. Then you wake up the next day and go back in for more punishment.

I remember, in those dark days of the financial crisis, going home after my mutual fund was down ONLY 1% that day and thinking, ‘hey, that was a pretty good day’. I had lost investors 1% in a day and considered it a good performance. That’s how bad things were.

So here we are again, with the worst market start in years, currencies dropping everywhere and investors throwing in the towel. What to do? Well, like Phil Connors (Murray’s character in the movie), learn from what is occurring. As an investor, there is nothing new here. China always causes problems. Oil is a cyclical commodity. Terrorists have been around for centuries. Take advantage of the fear, and scoop up good companies getting sold. Remember that most recessions are very short—nine months on average. Remember that markets always look really bad when they are falling, but, just like in the movie, things can turn around. Phil uses his time loop in the movie to learn French, play the piano, sculpt ice and impress everyone. He ends up with the girl of his dreams.

So, things are bad in the market. So what? You have seen it all before. Take advantage of this fact, knowing that this is just another ‘crisis’ that is going to end.

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MoneySaver DIVIDEND& COMPANY NEWS

In this column we list recent news, events,

dividend income news and any other relevant

information for MoneySavers. News items are

those received after our last publication date.

• Atco (ACO.X) increases dividend by 15%

• Canadian Utilities (CU) increases dividend by 10%.

• Sandvine (SVC) starts first dividend with a 2.2% yield.

• GMP Capital suspends dividends.

Canadian MoneySaver MODEL ETF PORTFOLIOETF SYMBOL CATEGORY PRICE # OF

UNITSTOTAL % OF

PORTFOLIO

iShares 1-5 Year Laddered Corporate Bond CBO FIXED INCOME $19.19 506 $9,710.14 8.7%

iShares DEX Universe Bond XBB FIXED INCOME $31.59 166 $5,243.94 4.7%

iShares S&P/TSX Canadian Preferreds CPD FIXED INCOME $13.02 460 $5,989.20 5.4%

iShares S&P/TSX Capped Composite XIC CDN. EQUITY $20.60 980 $20,188.00 18.2%

iShares S&P/TSX Cdn. Div Aristocrats CDZ CDN. DIVIDEND $22.96 633 $14,533.68 13.1%

iShares S&P/TSX Capped Energy XEG CDN. EQUITY $10.25 587 $6,016.75 5.4%

iShares S&P/TSX Global Gold XGD CDN. EQUITY $8.07 471 $3,800.97 3.4%

Vanguard FTSE Emerging Markets Index VEE EMERGING MARKET $27.29 194 $5,294.26 4.8%

SPDR EURO STOXX 50 FEZ GLOBAL EQUITY $34.43 144 $4,957.92 6.2%

SPDR S&P 500 SPY US EQUITY $203.87 33 $6,727.71 8.4%

Vanguard Div. Appreciation Index VIG US DIVIDEND $77.76 83 $6,454.08 8.1%

iShares Russell 2000 Growth IWO US GROWTH $139.28 69 $9,610.32 12.0%

Exchange rate 1.39

US Prices converted to C$ $109,349.48 Total Distribution $1,863.73

Starting Value October 18, 2013 $100,000 Gain(Loss) $ 11,213.21 Gain(Loss)% 11.21%

Prices are at market close on December 31, 2015

*Individual prices and distributions are not converted to CAD

**Total portfolio value, total distributions, '$ Gain' and '% Gain' reflect USD values converted to CAD

CURRENT NOTES: As of market close on January 8, 2016, we will be selling a full position in XEG and moving it into CDZ due to energy exposure already being held in the TSX composite and attractive valuations within CDZ. We will likely be adding to the emerging market exposure in the coming months, but would prefer for these markets to settle down a bit.

OTHER NOTES: Keep in mind all investors are different. This portfolio is designed as a guide in setting up your own personal portfolio. Unique considerations and adjustments need to be made to reflect your personal situation. Please perform your own due diligence before making investment decisions.

Returns are before transaction costs.

Please direct portfolio questions to [email protected]




Beating The TSX

BTSX – 2015/2016 Annual Update

Ross Grant

I know some of you are thinking 2015 was an awful year for the Canadian stock market and that you are glad it is over, but we need to put it in the proper perspective. You will see in

Table 1 that the XIU ETF that I use as my baseline had a total return of -7.7%. This obviously did not move in the direction we want but it is not too big of a setback if you consider that this negative return follows six years of positive returns since 2008. This market pullback has actually created some good buying opportunities, which I will highlight later, that we haven’t seen in the past few years.

For new CMS readers, please note that I use David Stanley’s BTSX process to pick the stocks each Dec 31st for the following year, with a few modifications.

Here are my guidelines/modifications:

1. If you are not comfortable with a particular stock on the list, don’t buy it. I don’t want to be losing sleep over owning a particular stock. That is just not healthy for anyone. An example would be if I believe a stock that appears on the list is in a dying industry or just has too many problems that leave me uncomfortable.

2. I always remove Husky Energy (HSE) from the list since its dividend payment history is erratic. The company pays out more when they make more and pays out less when they make less. This is really not the steady blue chip business that we are looking to invest in.

3. When POW (Power Corp of Canada) appears on the list, I replace it with PWF (Power Financial Corporation). POW is the holding company for PWF. I prefer PWF as it has a higher dividend. Given that the

performance of these two stocks track each other closely, it doesn’t appear to matter which one you own.

4. If a company cuts or reduces its dividend, then I sell the stock immediately. I have owned too many repeat dividend cutters. Dividend cuts in the BTSX portfolio don’t happen often but unfortunately it did happen this year with TCK.b and CVE. I detailed how I dealt with this situation in an October 2015 CMS article. The dividend cuts complicated the process this year but were worth the trouble to sell the two stocks after the cut. By year end Teck Resources was down 67% after I sold it and Cenovus was down a much smaller 8%.

January – December 2015 ResultsAs you can see from Table 1, the return for the BTSX

portfolio was -8.5%. This was -0.9% less than the XIU (iShares S&P/TSX index ETF) of -7.6%. I have also included the S&P/TSX 60 TRIV (Total Return Index Value) for comparison.

2015 was one of the years when investors would be more pleased with the less negative result of the XIUs in their portfolio than the BTSX results, although there was really not that great of a difference. I have always suggested using the XIU ETF as a starting point for new investors or experienced investors who don’t have time to invest in individual stocks. I still own the XIUs that I purchased when starting my portfolio. In years when XIU outperforms the BTSX, I am always happy to still own them.

Table 2 shows the average results over the last 15 years. The BTSX portfolio that I have been using is



outperforming the index by over 48%. The goal is to have a long-term average return that is greater than the index. We should not expect to beat the index every year.

In Table 3, the CAGR (compound annual growth rate) is shown, rather than the simple average numbers I usually work with. The CAGR number will allow a comparison to mutual fund returns or any other investment returns that indicate their CAGR number. As you can see, the BTSX portfolio currently is outperforming the index in all time frames except for the current year.

2016 BTSX Portfolio Table 4 (on next page) lists the

stock picks for 2016. These stocks are purchased Jan 1 and held until the end of the year, unless they cut their dividend.

You can use this list as you choose. You may wish to purchase all the stocks or perhaps use this list as a suggestion of high yielding stocks from the S&P/TSX 60 to review further. Some readers may want to follow the usual BTSX formula which would include HSE and other dividend-reducing stocks which would bump a couple of stocks off the bottom of the list. The choice is up to you.

The average yield of this year’s list is a high 5.3%. Even if the high POT

dividend is removed, the average is still 4.9%. This is a particularly high dividend yield when compared to the BTSX list of other years. This high number is an indication that there is a bit of a stock sale currently underway. One good example from the list is CM. Its stock price is down 8.7% from last year but they have announced four increases to their dividend since January 1, 2015, totalling 11.3%. Put another way, the investor is getting 11.3% more income from CM and paying 8.7% less for the stock. CM is a much better deal than it was on January 1, 2015!

ENB is a new addition to the list due to its 24% price decline and a 12% dividend increase in December 2015. Again a much better buy than a year ago. Of course there is always the risk of further price declines but no one knows what the future holds. All you can say for sure is that the stock is on sale!

The 5.3% dividend yield of this year’s list is another one of the exciting things about this strategy. If you are

Table 1. Beating the TSX Model Portfolio - Results from Jan. 1, 2015 to Dec. 31, 2015

Stock SYMInitialPrice

Final Price

Change(%)

1 Teck Resources TCK.b1 $15.88 $16.40 3.3%

Shaw Communications SJR.b1 $27.31 $23.80 -12.9% -9.6%

2 Cenovus Energy CVE2 $23.97 $19.10 -20.3%

TransCanada TRP2 $50.37 $45.19 -10.3% -30.6%

3 Potash Corp POT $41.07 $23.70 -42.3% -42.3%

4 National Bank NA $49.44 $40.10 -18.9% -18.9%

5 Bank of Nova Scotia BNS $66.31 $55.97 -15.6% -15.6%

6 Power Financial PWF(POW) $36.18 $31.81 -12.1% -12.1%

7 CIBC CM $99.84 $91.19 -8.7% -8.7%

8 Bank of Montreal BMO $82.18 $78.08 -5.0% -5.0%

9 BCE Inc. BCE $53.28 $53.46 0.3% 0.3%

10 Rogers Communications RCI.b $45.17 $47.72 5.6% 5.6%

Average (includes 5.2% dividend) -8.5%

XIU2 (includes 2.8% dividend) $21.47 $19.22 -10.5% -7.6%

S&P/TSX 60 TRIV3 2104.22 1940.94 -7.8% -7.8%

1SJR.b replaced TCK.b on April 21st, when TCK.b cut its Dividend. This is the price of SJR.b on this date. See CMS Article in October,2015 issue for details.

2CVE replaced TRP on July 30th, when CVE cut its dividend. This is the price of TRP on this date. See CMS Article in October 2015 issue for details.

2XIU is an investable S&P/TSX 60 index ETF.

3Total Return Value for the S&P/TSX 60 Index. Data from TMX-Money.com

Table 2. Beating the TSX returns vs. the index (%)2000 - 2015

Portfolio Index

Avg Yr. Total Return (%) 11.20% 7.6%

Portfolio Outperformance 48.3%

Table 3. CAGR (Compound Annual Growth Rate) BTSX - Jan - Dec list

Portfolio Index

15 Yr 10.2% 6.4%

10 Yr 8.5% 4.5%

5 Yr 9.6% 2.7%

3 Yr 10.2% 5.3%

1 Yr -8.5% -7.6%



able to live off 4% or less of your portfolio, as is often recommended by financial experts, then you can fund your retirement income from the dividends received without having to sell any capital. This makes portfolio income management quite simple.

Dogs Of The Dow Portfolio I also invest in Dogs of the Dow, so I have decided to

provide this list of stocks as well. This provides me with a US portfolio of high-dividend-paying blue chip stocks. As you can see from Table 5, for 2015 we had a return of 2.7% and thus beat the index by 2.4%. This return is in US dollars and thus does not take into account the additional gain in the portfolio due to the weakening Canadian dollar. Table 6 shows the average results from the last 11 years with an outperformance factor of 14.3%. This result is lower than the BTSX result, but still in our favour.

Table 7 lists the stock picks for 2016 with the new additions of IBM, PG, WMT and CSCO.

I will be purchasing all of the new stocks in the 2016 lists for BTSX and Dogs of the Dow, and hoping for the best, as usual. Due to the dividend increases, one of the benefits of owning these dividend stocks is that the total income from the portfolio is growing at or above inflation

Table 4. Beating the TSX Model Portfolio - 2016

Stock SYM Price1 IAD2 Yield3

(%)

1 Potash Corp POT $23.70 $1.52 US 8.89%

2 National Bank

NA $40.31 $2.16 5.36%

3 CIBC CM $ 91.19 $4.60 5.04%

4 Bank of Nova Scotia

BNS $55.97 $2.80 5.00%

5 Shaw Com-munications

SJR.b $23.80 $1.19 5.00%

6 BCE Inc. BCE $53.46 $2.60 4.86%

7 Power Financial

PWF(POW) $31.81 $1.49 4.68%

8 Enbridge ENB $46.00 $2.12 4.61%

9 TransCanada TRP $45.19 $2.08 4.60%

10 Telus T $38.26 $1.76 4.60%

1Stock prices at Dec 31, 20152Indicated Annual Dividend 3Average Yield of 5.3%

Table 5. Dogs of the Dow - Results from January 1, 2014 to December 31, 2015 All data is in US dollars.

Stock SYM InitialPrice

Final Price

Change(%)

Caterpillar Inc. CAT $91.53 $67.96 -25.8%

Chevron Corp. CVX $112.18 $89.96 -19.8%

Exxon Mobil Corp.

XOM $92.45 $77.95 -15.7%

Merck & Co. Inc. MRK $56.79 $52.82 -7.0%

Verizon Inc. VZ $46.78 $46.22 -1.2%

The Coca-Cola Company

KO $42.22 $42.96 1.8%

AT&T Inc. T $33.59 $34.41 2.4%

Pfizer Inc. PFE $31.15 $32.28 3.6%

General Electric GE $25.37 $31.15 22.8%

McDonalds Corp. MCD $93.70 $118.14 26.1%

Average (includes 4% dividend) 2.7%

DIA1 (includes 2.5% divi-dend)

$177.90 $173.99 0.3%

1DIA is an investable Dow Jones Index ETF.

Table 6. Dogs of the Dow vs. the index (%)2005 - 2015

Portfolio Index

Avg Yr. Total Return (%) 9.6% 8.4%

Portfolio Outperformance 14.3%

Table 7. Dogs of the Dow Portfolio - 2016 All data is in US dollars.

Stock SYM Price1 IAD2 Yield3%

Verizon VZ $46.27 $2.26 4.88%

Chevron CVX $89.96 $4.28 4.76%

Caterpillar CAT $67.96 $3.08 4.53%

Int. Business Machines

IBM $137.62 $5.20 3.78%

Exxon Mobil XOM $77.95 $2.92 3.75%

Pfizer PFE $32.28 $1.20 3.72%

Merck & Co. MRK $52.82 $1.84 3.48%

Proctor and Gamble

PG $79.41 $2.65 3.34%

Walmart WMT $61.30 $1.96 3.20%

Cisco CSCO $27.16 $0.84 3.09%

1Stock prices at December 31, 20152Indicated Annual Dividend 3Average Yield of 3.85%



each year. The total income gets an extra boost in January when the lower yielding stocks that move out of the top ten are sold and then replaced with higher yielding stocks.

Fortunately with this system, all that is left to do for the next twelve months is to watch for any dividend changes. Hopefully there will be many more increases than decreases!

Ross Grant is the e-book Author of Destination: Early Financial Independence, available on Amazon and Kobo for $5.99. Free e-reader software is available for PCs, MACs, etc. to view the books.

Please email Ross if you need the links. You can reach him at [email protected]

Readers Write

Irrational InvestingWhy Good People Make Bad Investment Choices

Matt Poyner

Most investors I know love new information. The fact that you are reading this right now probably means you do too.

Much of the information and advice we receive is based on modern economic theory. In order to generate predictions about investor behaviour, this theory assumes that investors are rational decision makers, assessing probabilities and acting accordingly.

For example, it should be reasonable to assume that Investor A would be willing to risk twice as much for an investment that returns 10% as one that returns 5%. Or, that a loss of 10% would be negated by an equivalent gain.

The reality, however, is quite different.

Consider the following scenario: You are offered a 100% chance of receiving $10000, or a 50% chance of receiving $25000 and a 50% chance of receiving nothing. What would you choose?

The mathematically optimal choice is to take a chance at receiving the $25 000, since 50% of $25000 is $12500

which is still more than the guaranteed $10000. But the vast majority of us would choose the $10000. When we are faced with a high probability of receiving gains, it turns out we are risk-averse.

Now consider another scenario: the choice between a 100% chance of losing $10000, or a 50% chance of losing $25000. What would you choose?

As you may have noticed, the mathematically rational answer is to accept the $10000 loss. But most of us would, in fact, act irrationally by taking the 50% chance of losing more than twice as much. When we are faced with a high probability of loss, turns out we are risk-seeking.

What these hypothetical examples illustrate is that human beings have an asymmetrical attitude towards risk. We feel losses more intensely than gains. There is a name for this: loss aversion. Figure 1 on the next page illustrates the idea that the magnitude of pain at losing $100 is much greater than the magnitude of joy at gaining $100.

What this means for investors is that the psychological pain of losing a certain amount of money is not cancelled




out by the pleasure of making an equal amount elsewhere. In fact, studies have shown that it would take a gain 2.5x greater to heal the psychological wound of the loss. We are not rational. Let’s look at a few real world examples.

What this means for investors is that the psychological pain of losing a certain amount of money is not cancelled out by the pleasure of making an equal amount elsewhere. In fact, studies have shown that it would take a gain 2.5x greater to heal the psychological wound of the loss. We are not rational. Let’s look at a few real world examples.

IPOs Are Like LotteriesStudy after study has shown that on average IPOs

(initial public offerings) are poor investments. Yet many investors, professional and DIY alike, show great interest, hoping to get in on the next Microsoft or Google. These success stories are so well known that our minds have an incredibly difficult time not associating them with other IPOs. This is called availability bias, and it is one reason humans are bad at understanding statistical realities – in this case, that the vast majority or IPOs are poor investments. Like people who play the lottery, we are irrational risk-takers when probabilities are low and potential rewards are high.

The Allure Of Fixed IncomeHistorically, government bonds have returned 6% less

on an annualized basis than equities. In the book, Stocks for the Long Run by Jeremy Siegel (highly recommended by this author), a bulletproof case is made that equities outperform bonds over the long term. Even the

Figure 1: conventional wisdom that bonds are less volatile than equities is false over multi-decade periods. Traditional economic theories relying on expected utility have a hard time making sense of the allure of government bonds. Viewed through the lens of our asymmetric attitude toward risk, however, the appeal of bonds makes perfect sense. The inherent volatility of equities, which by definition exposes the investor to losses, may cause great discomfort. Psychologically, the lack of short-term volatility in traditional fixed income products makes them feel less risky, even if over longer time horizons they may be a poor choice.

Buy High, Sell LowThe short-term volatility of equities has another

interesting effect on the psyche of investors – it tempts us to buy high and sell low.

Consider the following table showing the chances of positive versus negative returns for the S&P 500 over various time periods.

Most investors look primarily at the short-term fluctuations of equities. When stocks are up, we want in on the action so we buy high. But since losses are felt more acutely than gains, and stocks are down nearly 50% of days, investors who watch the market too closely tend to display risk-averse behaviour. Forgetting their long-term plan, or perhaps failing to make one in the first place, they lock in short-term losses by selling to avoid the chance of further loss, and miss the opportunity to buy when prices are low. Paradoxically, investors who spend less time watching their stocks may do better.

Hold Losers Too Long And Sell Winners Too Soon

We have all had this experience: a stock we once thought was great is seriously underperforming. We

S&P 500: 1926-2015

Time Frame Positive Negative

Daily 54% 46%

Quarterly 68% 32%

One Year 74% 26%

5 Years 86% 14%

10 Years 94% 6%

20 Years 100% 0%Source: Returns 2.0



MoneyTip

know we should sell, but there are so many reasons to hang on, to wait for the “inevitable” recovery. We tell ourselves that the rest of the market is crazy – it’s only a matter of time until the value of the company is realized again. But who is being irrational?

The investor already feels the loss compounded by uncertainty if the stock is not sold. On the other hand, if there is even a small chance of recovery, the investor will likely take it. We are wishful thinkers who abhor loss. It feels better to hold onto our losers.

The flip side of this equation is often seen with our winners. Imagine one of your stocks going up 50% in just a few months. All else being equal, most of us would feel compelled to take our winnings and run rather than risk losing those gains. This illustrates the fact that when presented with a certain gain, but a small risk of loss, we become risk-averse.

Stock PickingPerhaps the greatest delusion of all is that we just might

have the prescience to pick a stock that is about to take off. After all, it happens all the time…or at least it seems to in stories we read and hear. Like lotteries or IPOs, it is the scenario of high rewards but very low probabilities of those rewards that bring out the worst in us. Study after study confirms even professionals’ inability to pick stocks better than dart-throwing monkeys, yet the temptation remains.

The Solution: Humility And A PlanWe all feel the temptation to pick stocks that are going

to be winners, the reluctance to let go of our losers, and to play it safe when volatility seems too much to bear. We are wired this way as a result of millennia of evolution. The key to navigating the modern world of investments is to acknowledge the fact that we are not innately good at it.

Once we acknowledge these shortcomings, we can create plans to circumvent them. Adopt more passive rather than active strategies. Ignore the day-to-day market fluctuations and only reevaluate investments every six to 12 months. Pre-plan when you are going to buy and sell rather than reacting to short-term fluctuations.

Spend the time to make a simple, rational and well thought out plan. Then stick to it. As Charlie Munger says:

“Simplicity has a way of improving performance through enabling us to better understand what we are doing.”

Matt Poyner is a DIY investor and participant in the Oshawa Shareclub. [email protected]

2016 is off to a dismal start on poor economic data from China. Oil prices continue to show weakness and our currency has hit $0.70 CAD/USD. Depressions are rare; market bubbles and crashes are not. Unfortunately the investor has as much control over the events that cause such scenarios as they do the weather. What you do have control over is how you position your portfolio to deal with such times. If done properly, you stand the best chance to weather the storm. First, maintain a diversified portfolio and limit single stock exposure. This ensures you are exposed to outperformance and underperformance. The first results in gains and added sources of capital. The

latter can mean investment opportunities. Next, save for emergencies and take advantage of investment opportunities. Many investors profited during the Great Recession. Those with cash set aside were able to roll with the punches and take advantage of discounted stock prices and real estate. Finally, steer clear of consumer debt and pay off the mortgage. In a bear market, dividends can dry up, bond yields can fall and there is a lessened ability to borrow. This can put pressure on one’s ability to service debt.

Source: 76 Tips for Investing in an Uncertain Economy for Canadians for Dummies

2016 Off To A Dismal Start




The Uncommon Investor

Philip MacKellar and Benj Gallander

Is Silver Worth A Play During The Commodity Rout?

The impressive commodities bull market of the 2000s has been followed by an equally remarkable crash. Commodities across the board have hit hard as the USD has rallied

versus other currencies while the rapid increase in Chinese raw material demand has softened. For the time being it appears this trend will continue. Fortunately, the supply of many commodities – excluding natural gas and oil – is slowing or declining. Although the supply dynamic is positive and the Euro has already fallen dramatically, there could be more downside ahead, especially in the short term. It would not be surprising, for example, to see the Euro dip below parity with the USD or to see Chinese growth slow further before this cycle ends.

Assuming the end of the commodities downturn is not far away, this is a good time to scout out opportunities in this sector. One commodity which does not get significant attention – at least versus its big brother – is silver. While gold has dropped roughly 45 percent from its peak in 2011, silver has plummeted approximately 70 percent. Historically the latter has been much more volatile than the former and the current cycle has been no exception. Given this historic volatility, there is an excellent probability that when this cycle ends, the prospects for silver will be better than those of gold. Worth noting is that silver has a potential positive tailwind due to the high projected growth rates in industrial markets such as solar energy, water purification, medical devices, and nanotech.

Last summer Phil participated in a Yukon Territory mining tour. One mine he visited was Alexco’s (AXR – TSX) idled Keno Hill silver project. This enterprise has been on our radar for a few years due to its balance sheet strength, location in a mining-friendly jurisdiction, and environmental reclamation business. The Keno Hill region has been mined sporadically for over a century and unlike many operators in the Yukon, AXR has the

necessary infrastructure in place with their mill, roads, and power to fire up operations quickly when the market turns. In addition to this, the indicated resource is over 55 million ounces, three mines are fully permitted with another underway, and the estimated all-in sustaining cost is a reasonable $15.00. Albeit, that is higher than current lowly price of silver.

As an added bonus, Alexco’s environmental reclamation business has continued to produce revenue since the mining operation was idled in 2013, and provides the corporation with another sales stream, which offers it a significant advantage over other miners during these tough times. Going forward, the goal is to grow this throughout North America. The money in the kitty and the fact that the corporation has no debt will help.

However, there are caveats associated with a small company like this. Investors must beware the risk of dilution or draconian debt financing. In December, management closed a $4 million flow-through equity financing agreement and a $960,000 non-brokered equity financing agreement, which increased the share count by 5.78 million shares to a fully diluted share count of about 84 million shares. Overall the terms of this transaction are decent but further dealings of this nature cannot be ruled out, especially if the commodity downdraft continues or if mine restart costs are higher than the initial estimates of roughly $10 million.

While we like Alexco and think that when the market turns this could be a $5.00 + stock again (which is where it traded in 2012), the average daily trading volumes are nominal at about 50,000 shares a day. That combined with a stock price of around $0.50 makes buying a substantial number of shares difficult. Still Alexco may make a good investment for an individual investor who is not constrained by a low trading volume and who has



MoneyTip

both a strong stomach along with the patience necessary to stick with a small cap company in the resource sector during a bear market.

If Alexco is too small to catch your fancy, there are bigger silver companies out there that we have our eye on. These companies include Endeavour Silver, First Majestic Silver, Pan American Silver, and Standard Silver Resources. In our estimation, these companies should also do well when the fortunes for silver turn. Part of the assumption, though, is that the slump will not last too many more years, and if it does, many enterprises in this sector will succumb. However, all of these have a reasonable chance of survival, proven operational track records and well-defined resources. A couple other options for people intrigued by this arena are silver ETFs and/or purchasing the underlying commodity, but in all likelihood equities should do better than commodities when the market turns.

Normally in this space, Benj writes about companies that he already owns. That is not the case here and it will be interesting to see if some of these stocks make it into the Contra portfolio. Meanwhile, for those looking for a pretty much guaranteed return on investment, a trip to the Yukon during the sunny season is spectacular.

Phil McKellar joined the Contra team on a part-time basis in 2011 and has been investing since the early 2000s. He has been with Contra full time since 2014, before which he was a financial advisor for Freedom 55 Financial and an analyst at New Energy Finance in the United Kingdom. More recently, he was an analyst at Sustainalytics, where he assessed the environmental, social and governance dimensions for forestry, mining, steel, and utility companies.

Benj Gallander, MBA, Co-editor of "Contra the Heard", Toronto, ON (416) 354-2458, [email protected], www.contratheheard.com

“Never stop investing in yourself” if often touted as one of the best investments we can make. Given the importance financial well-being plays in everyone’s life, the same should be considered true for your finances. However, according to BMO Nesbitt Burn’s Savviest Investor Index, many Canadians are falling short on some key areas of investment focus. As per the 2013 survey, 84% of investors say they’re doing a good job of investing; but only 56% know their investment profile, which identifies their financial goals and risk tolerance. “While it’s encouraging that Canadians are optimistic about their ability to manage their investments, it’s concerning that such a significant number don’t have a written financial plan and are unclear about what investments they hold,” said Bill Brown, senior vice-president and managing director of BMO Nesbitt Burns. According to the survey, investors are most knowledgeable about guaranteed investment certificates or GICs (58%) and mutual funds (55%); however, only 19%

showed basic knowledge on exchange-traded funds or ETFs. Surprisingly, while many understood how their investments are impacted by interest rates (80%) and currency rates (66%), they were less knowledgeable about how stock market fluctuations (54%) and corporate earnings (38%) impact their investments. Seniors are the most likely to know what specific investments they hold (77%). Taking ownership of your money can help investors avoid common investment pitfalls that are often repeated: selling low/buying high, paying high mutual funds fees and chasing the next hot stock.

Source: http://business.financialpost.com/personal-finance/canadian-think-they-know-a-lot-about-investing-but-they-dont

Take Ownership Of Your Money


http://www.contratheheard.com

http://www.contratheheard.com

http://business.financialpost.com/personal-finance/



Using Wealth Wisely

21 Ways To Reduce Investment Management Fees

T here’s never been a time when it ‘s made more sense to control investment management fees. Years ago, when you expected a balanced portfolio to deliver an

average return of 10%, a 2% fee might have been OK. But when expected returns are closer to 4% you have to realize that although you’re taking 100% of the risk, a 2% fee would eat up half of your total return.

Other things being equal, a higher fee means a lower return. We should remember, however, that the main objective is not to minimize fees; the main objective is to achieve your goals. If a reasonable fee increases the odds of achieving your goals, that fee is justified.

Investors want value for the fees they pay. If no value is received, even a tiny fee is too much. And we measure whether value has been received by comparing actual results with the appropriate benchmark.

Investors have to be careful not to “cut off their noses to spite their faces”. It does not make sense for an investor to focus on minimizing fees if they would get better service and a better rate of return by paying a reasonable fee. Having said that, if you want to focus on minimizing fees, here are 21 points to consider.

1. Ask for a discount. Many financial advisors will offer a discount if you ask for it. No advisor offers a discount if you seem quite happy with the higher fee. The best time to ask for a discount is when you are starting a new relationship – before you sign the application form. However, if you’ve been with the same advisor for 10 or 15 years, you should know that fees are generally lower than they were when you first signed on as a client. If new clients are paying a lower fee - maybe you should as well!

Warren MacKenzie

2. ‘Buy and hold’ is the strategy that triggers the lowest fees. This strategy also defers the payment of capital gains tax. The disadvantage of ‘buy and hold’ is that you don’t get to lock in profits by rebalancing. And in the absence of rebalancing, your portfolio may eventually become higher-risk as the allocation to equities is expected to grow faster than the allocation to fixed income.

3. Use some exchange traded funds (ETFs) in your portfolio. Index-tracking ETFs have lower fees than mutual funds and your return will be close to the return of the market. A portfolio of ETFs will likely give you a better return than a portfolio of stocks that you pick on your own or that your advisor recommends.

4. Be a do-it-yourself (DIY) investor. Most DIY investors should use an ETF ‘couch potato’ type of portfolio rather than using individual stocks. DIY investors can be blind to their own shortcomings so they need to measure their performance compared to an ETF ‘couch potato’ type of portfolio with the same level of risk. Many DIY investors would fire themselves if they measure their performance compared to an appropriate benchmark.

5. Use robo-advisors. Robo-advisors are a class of financial advisors that provide online portfolio management services with minimal human intervention. Most robo-advisors employ algorithms such as Modern Portfolio Theory to rebalance ETF portfolios. Fees are a bit higher than a DIY investor using ETFs – but the disciplined rebalancing should more than offset the slightly higher fees. A big plus is that robo-advisors are licensed as portfolio managers and are therefore required to adhere to the ‘fiduciary’ standard which gives investors more protection than



the ‘suitability’ standard that is adhered to by most financial advisors.

6. Use a Private Investment Counsel (PIC) firm. These are the true professionals within the financial services industry and they offer active rather than passive investment management. PIC firms have lower fees than mutual funds and full service bank advisors, they follow a disciplined investment process, and they offer better performance reporting. They also adhere to the fiduciary standard.

7. Pay commissions rather than being in a fee-based account. In a well-managed account there will be few transactions so paying normal commissions per trade will usually mean lower overall costs than paying an annual fee based on the size of the account. And it makes no sense to be paying a management fee on cash or any securities which you never intend to sell.

8. Ask for a written description of all fees that will be paid. When it’s going to be put in writing, advisors are more careful about making estimates of fees (and they are more likely to mention the imbedded fees that you pay indirectly).

9. Avoid ‘structured products’. The highest fees and costs (largely hidden) are found in structured products that usually have some sort of guarantee that you’ll get your capital back. But it’s a mistake to pay a high fee for a product that will reduce volatility during the period when you don’t need the money – if by accepting some volatility you’ll have more money when you do need it. You should be comfortable with the volatility associated with the asset mix necessary to get the rate of return needed to achieve your goals. If you’re not comfortable with this level of volatility, it’s better to reduce spending rather than to pay the high fee associated with structured products.

10. Avoid performance fees. Performance fees are usually found in hedge funds and you need to ensure that the ‘hurdle rate’ and the ‘high water’ mark make sense. Be aware that a performance fee creates an incentive for the investment manager to take higher risk with your money.

11. Don’t be a frequent trader. Frequent trading is usually a sign that the investor is acting based

on an emotional response rather than following a disciplined investment process. It would be unusual for market conditions to dictate a rebalancing more than once per year. Someone once said that an investment portfolio is like a bar of soap – the more it is handled, the smaller it becomes.

12. Consolidate your accounts with one advisor. Usually the more assets an advisor is managing, the lower the fee will be. But you should only consolidate if the one advisor follows a disciplined investment process, creates a ‘goals based’ asset allocation, provides an investment policy statement that shows benchmarks and is in sufficient detail to hold the advisor accountable, provides performance reports that show performance compared to the benchmarks, and uses ‘best in class’ rather than ‘in house’ managers.

13. Know your Trading Expense Ratios (TERs). The TER is in addition to the Management Expense Ratio (MER). The TER typically adds between .01% and 1% (average is about .15%) to the annual cost. The TER comparisons are most useful when comparing similar types of investment mandates.

14. Avoid balanced funds. The MER for one large balanced fund (70% equities and 30% fixed income) is 2.48%. This is about 10% higher than the total of the MER in a portfolio with 70% in an equity fund (MER is 2.5%) and 30% in a fixed income fund (MER is 1.62%). Note: while the fee will likely be higher with a balanced fund, the higher fee may be justified since the benefit of the rebalancing will likely more than offset the higher cost.

15. Avoid deferred sales charge (DSC) mutual funds. Typically the sales charge on these funds is 6% and declines to 0% in 5 to 7 years. The commission earned by advisors is usually 5% up front. An additional problem with DSC funds is that investors feel locked in and are reluctant to move out of a DSC fund even if the manager is consistently underperforming compared to his or her peers.

16. Avoid Initial Public Offerings (IPOs). In a recent article by Matt Krantz (author of five books on investing), he explains that between the 2nd quarter of 2013 and the 1St quarter of 2014, more than two-thirds of new IPOs fell short. With an IPO the advisor typically earns a commission of



5%. Investors can often do better by avoiding the Initial Public Offering and buying the stock at a lower price in about one year’s time.

17. Avoid Segregated Mutual funds. Segregated mutual funds are a type of high-fee mutual funds (MER usually over 3%) which have benefits including guarantees at death or maturity, creditor protection, avoidance of probate, and the ability to lock in profits with ‘resets’. Typically investors have to hold the funds for 15 years to get a 100% guarantee. It would be unlikely that over a 15-year period there would be no growth in a well-balanced investment – so a guarantee that only gives you back your capital in 15 years is of questionable value.

18. Know how commissions on bonds is calculated. Investors should be aware that the commissions on bond purchases (including strip bonds) is usually calculated on the higher maturity value of the bond – not on the purchase price.

19. Consolidate to get Premium Pricing. Some fund companies will reduce the MER by 10 to 30 basis points if a family unit has more than $100,000 invested in the funds of a single fund company. Some fund companies have expanded the definition of ‘household’ to encourage this type of consolidation.

20. Make the investment management fee income tax deductible. The MER for a mutual fund or ETF is paid by the fund itself and is therefore not immediately deductible to the investor in the fund. On the other hand, the fees charged by investment counsel firms are billed and paid directly by the investor and are therefore income tax deductible (if not for registered accounts).

21. Change advisors. Investment management fees are lower today than they were 10 or 15 years ago. Most advisors who are opening up new accounts today are charging a lower fee than they did to open up the same size of account 10 years ago. If you have been with the same advisor for over 15 years and the fee has not changed – it may be possible to get a lower fee just by shopping around.

What’s a reasonable fee to pay for the complete service including advice, financial planning, portfolio design, investment management, rebalancing between managers,

transaction costs, pool operating costs and custodian costs? A recent study of investment counsel firms shows that for a $1,000,000 portfolio, the fee range for all of the above services is between 1% and 2.25%--with the most common fee being about 1.35% per annum.

Oscar Wilde is quoted as saying:

“A cynic is a person who knows the cost of everything but

the value of nothing”.

Wise investors will pay attention to fees but their primary focus will be on determining whether value is received for any fees paid.

Fees are important but the ‘after fee’ performance is even more important. Unfortunately few investors receive a performance report which shows how they’re doing compared to the appropriate benchmark. If investors don’t know if they are on track to achieve their goals or how they are performing compared to the proper benchmarks, they’ll not know whether or not they are receiving value for the fees they pay. In my experience most investors who are not measuring performance compared to a proper benchmark are underperforming the benchmark by about 2% per annum. If a 2% higher return would make a difference to you, you really should measure your performance compared to the proper benchmark.

Next Step: Take the test at http://www.weighhouse.com/

resources/is_it_time_to_fire_yourself.aspx . If you pass the test, continue doing what you’re doing. If you fail the test, give me a call and if I can help I’ll give you a proposal (with full disclosure of all fees) for my services.

Warren MacKenzie, CPA,CA is the founder of Weigh House Investor Services and a Stewardship Counsellor with HighView Financial Group. Email: [email protected] Tel. (416) 640-0550


http://www.weighhouse.com/


Investment Strategies

Is It Time To Buy Commodities?

If you’ve been following financial markets, you know that commodities have suffered very steep declines since last year. Oil, which traded at $105 (U.S.) a barrel in June 2014, now trades

around the $40 mark. Copper is hovering just above $2 per pound, down over 50% from its peak in 2011. These are just two examples: almost without exception, prices for commodities have collapsed.

Perhaps not surprisingly, many commentators are putting on their contrarian hats and suggesting that now is a good time to start buying beaten-up commodities. So, is this a good idea? Before I give my answer to this question, I think it’s worthwhile to go back in time and provide some perspective on how we got to where we are.

I think the story begins around 1998-2000. At this stage, commodities had been in a long bear market (oil was $10) and started a bull market based primarily on two factors: underinvestment in new supply due to low prices, and strong demand, notably from resource-intensive growth in the Chinese economy.

Then around 2004-2005 or so, Wall Street became enamoured with commodities and entered the fray. Everyone from pension funds to hedge funds and investment banks started buying commodities in order to profit from the bull market.

Much of the rationale for these bets was the presumed ascendancy of emerging markets and a belief that they had an insatiable appetite for raw materials. This, coupled with widespread conviction that supplies for many commodities were seriously constrained (think peak oil), caused prices for energy, metal and agricultural resources to soar. A declining U.S. dollar, as the U.S. mortgage market started faltering, added another boost as investors sought a safe haven. By July of 2008, commodity prices had gone parabolic, with oil touching $147.

Andrew Hepburn

And then it all came unglued: the financial crisis and great recession led to an implosion in resource prices. In early 2009, oil was under $40 and it seemed like the great commodity bubble was over for good.

In hindsight, it had merely taken a sharp and dramatic pause. All the rescue efforts by governments and central banks reignited the resources mania. Investors feared high rates of inflation as a result of the Federal Reserve’s quantitative easing and thus bought commodities as a hedge. Prices soared anew, peaking in 2011.

Why have prices fallen? For one thing, the inflation that investors sought refuge from never appeared. This has caused some investors to abandon commodities. In addition, high prices encouraged the supply of commodities to expand. The rapid increase of U.S. oil production exemplifies this trend, but it’s also apparent in many other raw materials markets. Another factor weighing on prices is the marked slowdown of the Chinese economy. In part, China’s deceleration has resulted in a real reduction in demand, but it’s also spurred speculators to sell commodities. Finally, the U.S. dollar has been on a tear against rival currencies, which has further pressured prices.

With commodities having crashed, many investors are probably wondering if this is a tremendous buying opportunity. I would advise caution in this regard. There will of course be rallies, but for investors with a longer term time horizon, I think a sustainable commodity bottom is years off.

Part of my caution is due to the nature of commodity price cycles. Generally speaking, bull markets in commodities tend to be shorter than the bear markets that follow. For example, Credit Suisse recently published the following chart illustrating this phenomenon in oil. As you can see, real oil prices (i.e. adjusted for inflation)



Undoubtedly, many investors have reduced or eliminated their commodity holdings. Some have gone short. Nevertheless, speculators are still long (i.e. bullish) over 200 million barrels of crude oil futures on the New York Mercantile Exchange. To my mind, this sort of

bullishness is not what we will see when prices have truly bottomed out. Rather, we need the kind of utter capitulation where virtually no one wants to own commodities. That should be a telltale sign that the market is ready for its next bull market.

My concern isn’t simply that financial players are still exposed in the paper futures market. As I’ve mentioned in previous articles, some traders and investors now buy and store physical commodities. You can probably chalk some of this activity up to pure speculation, and in part to attempts to create artificial shortages of some commodities.

Along these lines, Dow Jones Newswires reported in 2008 that hedge funds and others were storing as much as 800,000 tonnes of copper in Chinese warehouses in a bid to create the illusion of a tight market. More recently, The Wall Street Journal reported in late 2013 that banks, hedge funds and commodity traders owned

tens of millions of tonnes of base metals that were being stored in warehouses around the world.

Before commodities have bottomed, I expect much of these excess inventories held by investors to be liquidated, thereby pressuring prices even lower. The fact that this does not seem to have occurred yet makes me very wary of calling an end to the current malaise in resources.

There will be opportunities for nimble traders to make money-buying commodities for short periods of time before prices reach their ultimate low. Moreover, it’s always possible for some individual commodities to rise even though most are stagnant or falling. But for investors looking to buy the sector at the bottom, I think that time is still a ways off.

There’s an adage in markets that you shouldn’t try to catch a falling knife. When it comes to commodities, I think the knife has yet to hit the floor.

Andrew Hepburn is a freelance writer in Toronto. He specializes in economic and financial issues and a former Research Associate with Sprott Asset Management in Toronto focusing on commodity markets. He is a graduate of Queen's University [email protected]

tend to have brief, sharp upswings after which prolonged periods of low prices ensue. I would add that a good case can be made that we are really only a year and a half into oil’s bear phase, given that prices were still in the triple digits last June.

A second reason for my reluctance to call a bottom in commodities is the state of the Chinese economy. While I believe China’s actual consumption of raw materials has been overstated in recent times, there is no doubt that its real estate and industrial sectors do consume a significant share of the world’s resources. China is slowing, likely more than its government admits, and the country is beset with massive unprofitable overcapacity in many sectors. Further, there has been a rapid expansion in both corporate and local government debt since the financial crisis. Taken together, China’s economy should continue to falter, with negative implications for commodity demand.

Third, across many different commodity markets, low prices have not yet triggered a meaningful reduction in supply. Until this happens, the world will be awash with heightened inventories of raw materials.

There’s one final reason to believe we haven’t seen the lows in commodity prices. As I’ve discussed, investors became enchanted with commodities in the last decade. In essence, resources became just another asset to own, much like stocks or bonds. Numerous exchange traded funds were created that allowed retail investors to get in on the game alongside the largest financial players in the world.




Advisor Advice

Are My Investment Advisor’s Cookie Cutter Asset Mix Recommendations Hurting My Performance?

Most retail clients are very aware that the asset mix is the single most important variable in investment performance, but they would be surprised to learn that

their advisors largely do not make proactive investment decisions. Active asset mix investment decisions based on projected returns for each asset class are the exception not the rule. The compliance departments have become so important that they frequently override any actual active asset mix decisions that are made. The analogy is comparable to the medical community in the US that is afraid to do some procedures that are in the best interests of the patients for fear of being sued.

Currently the asset mix decision has become even more important in portfolio returns. Equity returns have been largely negative year to date, especially in Canada where declining commodity prices have decimated the heavily weighted cyclical sectors. In addition, the probability of higher interest rates from the current very low levels does not provide for strong fixed income returns going forward. Taking into account this negative security market environment, one would expect a more proactive reduction in portfolio risk recommended by the private money managers in favour of more cash and liquid assets. It is true that some use a minimum to maximum range for each asset class to properly align portfolios with the current outlook. However, this is the exception, not the standard for most bank branches, financial planners and brokers. Many clients of these organizations continuously complain that their portfolio’s asset mix rarely changes. In fact, several clients had to

Peter McMurtry, CFA

complain sufficiently enough to their advisors to make some asset mix changes. These recommended changes should really be emanating from the advisor to the client, not the other way around as is often the case. High cash levels are rarely advised even on a short term basis as financial institutions do not make sufficient fees from liquid funds. From a purely monetary point of view, many

financial institutions advise their clients to be fully invested to maximize their own corporate compensation in managing client portfolios. It is obvious that these organizations do not always have your best interests in mind.

In addition, private clients deserve the same type of participation in non-traditional asset classes such as hedge funds, private equity, private real estate and higher yielding senior floating rate loans that are normally only available to large pension funds. In this day and age, it would not be such a difficult task to unitize these investments into both mutual and exchange-traded funds in order to make them available to smaller retail clients.

Clients are becoming much more investment-savvy than ever before and are more impatient with legal jargon combined with flip marketing phrases. What the clients need and want is real advice that can benefit them, not simply strategies to protect their advisors’ interests only. I have seen retail client portfolios with the same asset mix throughout an entire economic and stock market cycle without any recommendations provided whatsoever. This is not management, but purely sales and adherence to strict compliance rules.

Retail clients

deserve the same

benefits from active

asset mix strategies

that large pension

funds continue to

receive...



MoneyTip

Whether your monies are managed by a bank branch, broker or financial planner, your asset mix selection will be a choice of four or five cookie cutter pie charts with titles like Income, Income and Growth, Growth and Aggressive Growth. Each of these options usually offers a range of minimum and maximum levels of cash, fixed income and equity weights.

Despite their apparent interest in your risk tolerance and time horizon, these categories are essentially created by these companies’ compliance departments to ensure that they are not sued by any disgruntled clients. Their asset mix selection are not actively managed and are solely based on assessing a client’s tolerance for market volatility combined with a review of the age and time frame before any income needs become the number one priority for the client.

Another traditional asset mix strategy still used by many advisors is to subtract your age from 100 and use this to determine your equity weight exposure. Many years ago I began to manage my grandmother’s monies when she was in her mid-eighties. If I had chosen to use the 100 less her age strategy, my grandmother’s stock exposure would have been a maximum of 15%. I decided to actively pick her asset mix, and maintained an even

balance between stocks and fixed income until she went into a nursing home at the age of 103. By maintaining sufficient equity exposure, I was able to grow her capital at the rate of inflation and this greatly helped to finance her nursing home expenses when she needed it at the end of her life.

Both large institutional pension investment managers and investment counsellors have traditionally actively managed their asset mixes for their clients. It is unfortunate that this is not the norm for retail clients managed by bank branches, brokers and financial planners.

This lack of flexibility combined with frustration over high management fees and poor performance are the main reasons that the discount broker industry has flourished in recent years.

Retail clients deserve the same benefits from active asset mix strategies that large pension funds continue to receive, regardless of the type of organization managing their monies.

Peter McMurtry, B.Com, CFA, Financial Writer [email protected]

Investors are often taught that the investment decision should be evaluated in the context of the entire portfolio. This of course remains an appropriate principle of investing. However, investors often mistakenly translate this to mean single stock weightings can be solely evaluated in the context of the total portfolio. It is important to additionally look at your equity portfolio weights in isolation. The reason being is that the equity portfolio plays a critically different role than the fixed income portfolio, alternatives or cash. Assume you are a balanced investor with a $100,000 portfolio split 50/50 between equities and bonds. You have

evaluated the prospects of stock XYZ, a mid-cap with strong growth potential. You invest $5,000. Although this is risky, the investor overlooks the risk, as it is only a 5% total portfolio weight. The stock goes bust. The investor just lost 10% of the equity portfolio. Now, one has set back the portion of the portfolio you rely on for growth. The investor will require at least a full year of equity return (on average) to make that loss back. If XYZ had been viewed relative to the equity portfolio, the investor would have seen the overexposure and could have adjusted.

Source: 5i Research

Small Details Matter




Market Strategies

Why Your Brain May Not Be Helping You Make The Best Decisions

Dr. Daniel J. Levitin is one of the world’s top neuroscientists, a bestselling author, and a multi-platinum record producer who has worked with the likes of U2, David

Byrne and Stevie Wonder. He is also one of the coolest and most fascinating people on the planet.

Dr. Levitin spends his days studying how our brains process information and, by extension, how we perceive the world through the miracle that sits between our ears. In his latest book, The Organized Mind: Thinking Straight in the Age of Information Overload, he makes a compelling case that I think should be required reading for all investors, about how the hard-wiring in our brains can significantly impact the choices we make – and lead us into making some very bad financial decisions.

According to Dr. Levitin, our brains are built for the hunter-gatherer age, not the Information Age. This natural evolution has a variety of implications for how we perceive and react to the world. Some of those reactions serve us well. Others not so much.

In the hunter-gatherer era, for instance, we might have encountered at most a thousand people in our entire lifetimes. Today, if you go for a stroll through downtown Toronto at lunch, you’ll likely run into twice that many people over the course of a single hour. That’s a big difference. But while our conscious minds may realize how much things have changed, our brains still want to process the world around us like we’re back on the savanna.

For example, when we need to remember something important today, most of us write it down. But writing was only invented about 5000 years ago. Our brains, on the other hand, have been evolving to survive as hunter-gatherers for more than 200,000 years. Since we didn’t have writing for most of those 200,000 years, our brains

Alan MacDonald

had to figure out other ways to remember the stuff that was really important. One of the most effective strategies was to associate those important memories with vivid first-person accounts that would make them impossible to forget.

If someone you knew died after eating poison berries, for instance, that was pretty important information to have. To help you remember it, the you of 200,000 years ago might have attached a story to the berry incident – like how the person who died was related to you, how they had angered the spirits before going foraging that day, or any other number of personal details that would make the account as vivid, memorable and transferrable among a small group of people as possible.

First-person accounts were especially reliable back then, because you only ran into a small group of people in a relatively limited area, so whatever happened to those people likely applied to you as well. There wasn’t a mass of data and information to deal with. Just the simple, eat-or-don’t-eat decisions that meant the difference between life and death.

Fast-forward to today. We now have access to millions of times more information than our ancestors could’ve ever imagined. But our brains are still programmed to prefer those vivid, first-person accounts.

That’s why, when advertisers want to launch the latest anti-depressant drug, they don’t buy 10 minutes of airtime and lay out all the scientific data. Instead, they show us people frolicking happily in a field, while a voiceover talks very quietly in the background about all the ways this shiny new pill might kill you. Marketers know that all we’ll remember is the frolicking part – not the bit about how taking the pill could actually make us feel worse.



When it comes to investing, we have just as strong an urge to accept emotional first-person stories as truth, while simultaneously ignoring the real facts that could actually help us make smarter decisions. I was talking to a friend the other day who told me that his “Uncle Ted” had lost all his money in the stock market. Based on that story, my friend had decided that stocks clearly weren’t a safe investment.

Since people like Warren Buffett make billions of dollars in the stock market year after year, we all know something’s not quite right with my friend’s conclusion. But because his Uncle Ted is a more vivid and personal character in his life than the Wizard of Omaha, he’s more inclined to look to his uncle’s story for guidance, rather than patterning his actions after the most successful investor the world has ever known.

If my friend wanted to make a decision informed by facts, he would need to look closely at the specifics of the strategy his uncle adopted, to see where his plan fell apart. But what happened to Uncle Ted is more powerful than mere objective analysis. It’s a good story about someone he actually knows. And good stories are very, very sticky to our hunter-gatherer brains.

Take the expression: “you’d be better off putting your money under your mattress.” It’s hard to argue with what feels like the emotional “truth” of this old chestnut. But you might find it interesting to know that this expression was born during the Great Depression, when mass deflation meant that a dollar hidden in your mattress would actually be worth about 25% more a few years later.

In the 80-plus years since the Depression, however, we’ve had nothing but inflation. A dollar hidden in your mattress 20 years ago would be worth much less today than it was when you first squirreled it away. But

despite this fact, the deflation of the 1930s made such a massive, vivid and personal impact on everyone who went through it that even now, generations later, we still feel on some level like that mattress idea might just be a solid investment strategy.

When it comes to making important decisions — and not just investment decisions — we need to watch how our underlying wiring may be trying to mislead us. Even now, when we have virtually unlimited information at our fingertips, our brains are still programmed to prefer personal anecdotes over objective evidence.

Sometimes, those stories may be right. But if they can’t stand up to the cold, hard light of scrutiny, then maybe it’s time to re-think whether a better decision might be just a few facts away.

Alan MacDonald, an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon. For more information please visit www.alanmacdonald.ca or email Alan at [email protected].

All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates. Past performance is not indicative of future results.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

Coming Events

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The World MoneyShow Conference Orlando, Florida USA

March 2-5, 2016

Webinar: What we learned in 2015 and what to expect or watch for in 2016. Cost: $3.00.

Peter Hodson March 24, 2016 11am-1pm EST

Please go to www.canadianmoneysaver.ca/events for more information and to register.

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Technically Speaking

Will That Be “Buy”, “Sell” Or “Hold”?

W hen it applies to professional or private investing, I have learned from experience that it is one thing to know the path and quite

another thing to walk the path. In other words, there is a difference between hypothetical investing and real money investing.

Knowing The Path:For example, the stated objectives of the $480 million

actively managed RBC O'Shaughnessy International Equity fund are: “To provide a long-term total return, consisting of capital growth and current income by investing primarily in equity securities outside of North America based on Strategy Indexing, a rigorous and disciplined approach to stock selection based on characteristics associated with above average returns over long periods of time.”

International equity investing means investing in any region or country to exclude North America and so the relevant benchmark is the MSCI EAFE (Europe, Australia and the Far East) index expressed in Canadian dollars.

Strategy Indexing is a discipline developed by James O'Shaughnessy, a formidable cruncher of historical market data. His Connecticut-based O’Shaughnessy Asset Management is currently a sub-advisor on seven Royal Bank of Canada O’Shaughnessy mutual funds.

O'Shaughnessy knew the path because years of back-testing on Strategy Indexing produced better long-term returns over a buy-and-hold indexing strategy.

Walking The Path:The problem is that, when RBC and O'Shaughnessy

applied the Strategy Indexing model to real money

Bill Carrigan

(walking the path), their International Equity fund as of October 2015 under-performed the EAFE benchmark over the last 1-year, 5-year and 10-year periods.

In fairness to O'Shaughnessy, that MER of 2.25% was a significant drag on returns – which is a problem for most actively managed mutual funds.

The unique feature of O'Shaughnessy’s Strategy Indexing model is the hybrid structure which is based on a blend of both fundamental and technical analysis

The fundamental analyst will study a company’s quarterly financial statements which display items such as revenue, profits, assets and liabilities. The fundamental analyst will also use the financial statements to gain insight on a company's future performance. Earnings momentum is a component of the O'Shaughnessy Strategy Indexing model.

The technical analyst will use studies such as price, volume and relative performance to gain insight on a company's future performance. Price momentum is a component of the O'Shaughnessy Strategy Indexing model

I walked the path from February 2010 to February 2012 when I was a sub-advisor to the $44 million Union Securities Hybrid Investment Program which was a discretionary equity only service using both “fundamental” and “technical” analytical tools to construct the portfolio.

The fundamental analyst (let’s call him George) was a value investor who only bought “cheap” stocks. Most of my technical selections were based on long bases accompanied by bullish volume spikes.

The program was simple in structure. George and I would each select at least ten stocks or ETFs. Each



Over the same time period our benchmark TSX Composite Index had a two-year capital return of +9%.

Over the same time period there were twelve fundamental selections that as a group had a negative capital return of -8 %. There were 15 technical selections that as a group had a positive capital return of + 32%.

Our fundamental guy – George—had two problems that seem to be common in many fundamental methodologies. He was drawn into value traps and he clung to the stubborn belief that gold stocks were a natural portfolio hedge.

George took huge losses in Research In Motion Limited (BlackBerry Limited) and three gold miners.

I kept the technical work simple by embracing the tools of “old” technical analysis as opposed to “new” technical analysis.

“Old” And “New” Technical Analysis:

There is quite a difference between the two and as a long-time active participant, I describe old technical analysis to be all materials and knowledge, such as books, charts and research reports generated before 1985 (the Internet and the personal computer) and new technical analysis to be all materials and knowledge generated after 1985.

In the days before computers and the Internet, we subscribed to weekly and monthly chart book services. We studied books such as the 1958 fourth

edition of Technical Analysis Of Stock Trends, by Robert D. Edwards and John Magee, which focused on pattern recognition, trends and volume.

The first technical superstar was Joseph Grandville who, in his 1963 classic book Granville's New Key to Stock Market Profits, introduced on-balance volume (OBV), a momentum indicator that measures positive and negative volume flow. It was Granville who proclaimed “volume precedes price and price precedes fundamentals” – a technical argument still embraced by us older guys.

I still review my 1978 classic publication of Elliott Wave Principle by Frost and Prechter.

My problem with new or “modern” technical analysis is that thanks to the Internet and social media, there are simply too many technical studies for the average investor to wade through.

selection would be about a 3% weight which would increase if George and I selected the same stock or ETF. We also believed the risk or volatility of the Hybrid portfolio would be reduced due to the blending of fundamental and technical analysis.

The program was to be fully invested with no market timing. There would be quarterly rebalancing and any component sold by George or me had to be either replaced or the proceeds used to boost an under-weight component.

Over the same 24-month period the Hybrid Program enjoyed five technical selections that were the subject of takeover speculation or bids—namely, Gerdau Ameristeel, El Paso Corp, Biovail Corp. Viterra Inc. and ShawCor Ltd.

Chart #1 Viterra’s long base breakout

Over the same period, George had no selections that were subject to takeover speculation or takeover bids.

When one walks the path or engages in real money investing, one soon learns that stocks can trend up, down or sideways for months and even years.

For example, Canada’s premier energy company Suncor Energy Inc (TSX-SU) at $37 is virtually at the same price level as ten years ago. Conversely, Canada’s specialty packaging company CCL Industries Inc. (TSX-CCL.B) at $207 is well above the $28 price of ten years ago.

I tested this trend tendency by tracking the performance of the Hybrid portfolio beginning with all the fundamental and technical selections held at November 9, 2011 and hypothetically held through to November 12, 2013.



Most of the popular charting websites offer free charts and the choice at least 50 technical studies or indicators. I use two PC-based charting programs, each offering over 150 built-in indicators and line studies, most of which are squiggly line studies that I never use.

I am an active member of the Canadian Society of Technical Analysts (CSTA) whose mission is “To promote Technical Analysis at both academic and professional levels, through education and the sharing of knowledge with the community of technical analysts and the investment industry, and through the establishment and fostering of the highest standards.”

At a recent CSTA 2015 Annual Conference, there was a guest speaker who presented several new market timing indicators, including the following: Sequential, Combo, Setup, Setup Trend (TDST), Countdown, Range Expansion Index, D-Wave and TD Lines,

The guest lost me at “new” – to me it was simply more squiggly line studies that I would never understand or use.

My technical work is based on a few old studies such as trend lines, relative performance, on-balance-volume and Elliott Wave.

All you need for trend lines is a bar chart (weekly bars preferred), a pencil and a straight edge. In an up-trend, you join at least three significant lows and in a down-trend, you join at least three significant highs.

To study relative performance, you need to compare your investment selections (X) to something else (Y) – be it a sector peer or a relevant index. Your visual study line—or spread—would be (X/Y) or (X-Y).

On-balance-volume (or OBV) is an old money flow study still in use today. Your visual study line is the running cumulative volume that adds a period's volume when the close is up and subtracts the period's volume when the close is down. The OBV line will often lead the price direction.

Elliott Wave is basically an extension of one tenant of Dow Theory and the three phases of a bull market. According to Charles Dow, the first advance is the accumulation phase—often thought to be a bear market rally. The second phase is the recognition phase where there is broad leadership and participation, and finally the third and final speculation phase which is usually accompanied by thinning leadership.

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns

Basically a bull phase would have five waves (impulse or numbered phase) and a bear phase would have three waves (corrective or lettered phase)—for a total wave count of eight.

When the pattern is completed it is repeated but not necessarily in time or price magnitude.

Walking The Path With Elliott Wave:

During the latter stages of a long bull market, investors can get confused and begin to engage in market timing or over-trading. The best approach would be to understand the longer term structure of the great 2009 – 2016 advance in the major global stock markets. If we apply long-term analysis to an important bellwether, we can better identify our current location within the great 2009 – 2016 advance.

Berkshire Hathaway Inc. Cl B (BRK.B) is a bellwether conglomerate-holding company owning subsidiaries engaged in a number of business activities, and is basically a proxy for the world’s largest economy.

Our long term plot of BRK.B (Chart #3 next page) displays the Elliott Wave structure of the great advance that began from the lows of 2009

Impulsive(Numbered)

Phase

Wav

e 1

Wave 2

Wave 4

Wave a

Wave c

Wav

e 3

Wav

e 5

Wave b

Corrective(Lettered)

Phase

1

2

3

4

a

b

c

Chart #2 – displays a typical Elliott Wave count



MoneyTip

Elliott Wave #1The first bull cycle (1) originated from the lows of 2009

and peaked in early 2011. This was a rebound bull that typically occurs after a crisis bear such as the 2007-2008 global financial crisis which was initially thought to be a bear market rally.

Elliott Wave #2A short corrective wave that troughs in late 2011 –

always higher than the low of 2009.

Elliott Wave #3The second bull cycle that originated from the lows

of late 2011 and peaking in late 2014 –this bull was powered by the easy money policies of the major central

banks. An Elliott Wave #3 is usually the longest advance and has broad participation as a rising tide lifts all boats.

Elliott Wave #4A second corrective wave is usually longer

and more complex than the first corrective wave. Investors turn fearful and begin to sell their winners. The trough can never enter the space of the first Elliott Wave #1 advance.

Elliott Wave #5If we get a typical Elliott Wave count, then a

third advance or wave #5 should follow the current 2015 bear in Berkshire and persist through 2016.

The 2016 Outlook:A final Elliott Wave could be powered by a

perception of global growth. Wave #5 advances or up-legs are typically high risk – unlike the prior two advances. They tend to have thin leadership and can be of less price magnitude than the first two advances.

Also what worked in the prior wave #3 advance (consumer & health care) may not work in the final advance. Conversely the losers in the prior wave #3 (advance, energy and materials) may outperform through 2016.

So now we know the path, I suggest we walk the path with caution.

Bill Carrigan, CIM is an independent stock-market analyst. He can be reached at: [email protected].

Chart #3 – displays Berkshire Elliott Wave count

A new year has an encouraging effect on many investors as they look to the prospects of future returns. 2016 is likely no different with a dismal latter half to 2015 behind us. At this point, investors often look to their portfolios to ensure that the appropriate framework is in place for success. In building the ideal investment portfolio, Tony Robbins suggests that investors adhere to four core principles as they head into 2016 in creating the ideal investment portfolio. These core principles include diversifying your assets,

finding investments with asymmetric risk and reward, taking appropriate risk for your risk tolerance and not losing money, and creating a tax-efficient portfolio. “Ultimately, you want to make sure that your portfolio aligns with these Core Four principles so that you’re protected no matter what,” said Robbins..

Source: http://www.GOBankingrates.com/personal-finance/12-influential-experts-give-top-money-tip-2016/

Four Core Principles



http://www.GOBankingrates.com/personal-finance/12-influential-experts-give-top-money-tip-2016/






Wealth Creation and Preservation

The Contented Investor

Over the years a number of our readers and program participants have asked me—as a millionaire at 50—what I would do differently if I were to do it over again.

That is a big, involved question and after thinking about it for more than a decade, I thought writing this article would be the best way to answer it. This report is not about me but my learnings and beliefs about how I would describe ideal practices of the mythical contented and successful investor, who I call Will Gardiner.

Know YourselfThe basic personal needs of our Contented Investor,

Will Gardiner, have been a determinant of his investment goals, strategy and success to his present age of 57. These universal needs for safety and security, belonging and acceptance, and recognition and power are well balanced for Will’s contentment and investment success. In general terms he is 20% a Cautious Obliger, 20% a Friendly Helper, 40% a Logical Thinker, and 20% a Strong

Hedley Dimock

Achiever. One size does not fit all but Will does not sit around procrastinating about barely managing inflation bonds or push around trying to catch hot stocks.

First Investment CourseWhen Will was 25 and married with a daughter,

his father suggested he attend an investment course for beginners being given by his father’s broker. Will and his wife, Mary, attended and came out of it with two learnings – the magic of compound interest and the value

of no procrastination and investing immediately with one secure blue chip stock. This was 1983 and both he and Mary invested in Bell Phone. Mary ordered a ‘board lot’, misunderstanding this new term. She after learned she had to sell most of it back as they could no way afford it and were soured on any further stock investing. The course, while generally difficult to follow, did perk an investment interest in Will and helped to get him started.

Investment GoalsAbout the same time as they took the

investment course, Will and Mary had been talking about their financial situation and some security such as a nest egg of savings and life insurance, at least for Will. Their new baby had increased their expenses and they were striving to be prudent and frugal, hence they agreed that

security for the family was the number one financial goal. Number two was closely related as it was to create wealth for family security including in addition to basic survival needs, health and education. The third goal was to create wealth for comfort, enjoyment and a satisfying retirement.

The Investment PlanThe plan that emerged from their goal setting was

Quick Quiz to help you warm up:

1. Would your lifestyle remain about the same if you earned $10,000 more a year?

Yes No

2. If you were short of time for your investment work could you manage it in 2 -3 sessions of 90 minutes this year?

Yes No

3. If you are married, was your Income Tax less than 20% of your income last year? Yes No

4. Have you invested in a significant money-making hobby/recreational activity (cottage, time share, stamp collection, collectables, boat, skidoo, etc.)?

Yes No

5. Has your investment portfolio earned over a 10% average for the past 5 years (2009-2014)? Yes No



to start a regular ‘nest egg’ savings fund of 10% of their earnings a year and only borrow against it until it reached a value of a million dollars. They were unsure of what the future would bring or what inflation would do to retirement needs but thought the 10% of income would reflect inflation and income ups and downs. On reaching the million dollar goal, they could review inflations devaluation of it and consider using some of its dividend payments for increasing lifestyle enjoyment while keeping the capital intact. They also agreed that they would both sit down twice a year and review how they were doing with a readiness to make modifications. This plan achieved its purpose, made the million dollars, and is still in use.

Investment Strategy Will and Mary started out with no clear strategy other

than the assignment from the course to ‘get started now and with something that you know that was tried and true’. After Bell Canada and the ‘board lot’ fiasco, they started saving up for a house. With help from parents, they were able to buy one the next year. It was one of the best investments they ever made as were the next two they bought.

A comprehensive strategy emerged later when Will took a year off to get a Master’s Degree in guidance and counselling. He spent a lot of time in the library and was able to read up a fair bit on financial planning and investments. It was the Trudeau years of high inflation (18-20%) and bonds, preferred shares and mutual funds were doubling money in five to seven years. These investments fitted perfectly into his personal needs as a ‘Friendly Helper’ going with the flock to create wealth and be a ‘Logical Thinker’ – an enjoyable combination. He wanted to be a do-it-yourself investor but found it helpful and reassuring (his security need) to get information and suggestions from an investment broker.

The technology crash a decade later brought his ‘Logical Thinker’ into the driver’s seat. The Money Letter, The Financial Times and especially David Stanley’s “Beating the Toronto Stock Exchange” articles in Canadian MoneySaver were resources that helped. He modified his strategy, dropping most bonds, all preferred shares and most mutual funds. He moved to a portfolio of diversified, balanced holdings featuring blue-chip stock he knew with high dividends that increased annually.

Diversification, Evaluation And Balance

Will’s Master’s degree was completely funded by the

government’s mental health grant and his new job as chair of the high school guidance department increased his salary quickly to $ 80,000 and he had real money to invest. His ‘Logical Thinker’ had him doing his investment homework and twice a year he did comparisons with the TSX index earnings and adjusted his holdings.

He was well informed about the need for diversification but believed the media and experts’ insistence on complete diversification and balance was overblown and could be counterproductive. He continued to invest in what he knew and only adjusted with his buy-and-hold strategy and used five years as his focus. When the media went all out on international investing he checked several of his Canadian stocks and found that 50% or more of their investments were in foreign countries. He thus avoided foreign exchange, taxes and political shifts in foreign economies as well as companies he did not know. He also got the tax reduction for his Canadian dividends.

He was barely impacted by the technology meltdown as his only tech holding was the Northern Telecom part held by Bell Canada that he continued to own. The 2008 recession did not affect his portfolio more than a few dollars for while two of his stocks cut their dividends, two stocks raised them.

The Gardiners’ diversification continued over the next few years as they bought several acres of lakeshore property as two adjoining but separate lots. They camped out in a tent for two years and then built a cabin on one lot and put in hydro and water. They kept the other lot as an investment or for the kids’ or grandkids’ possible use in the future. As waterfront lots and cottages rapidly increased in value, they added more value with a sleeping cabin, a large dock, boathouse and ramp, and large parking area. They also winterized their cottage and started using it in the winter for skiing, ice skating and ice sail boating. It was all a very good investment and pushed their nest egg’s value to over the million-dollar goal.

Asset AllocationWill shifted the family assets around considerably as

the economy and investment products changed and made the shifts based on their wealth creation and security strategy. He moved out of fixed income as their rates fell in half and divested most of the mutual funds as his own choices continued to beat most all of them. He tested inflation-based fixed income (briefly), liked several trust companies, thought Exchange Traded Funds were good (but he was usually beating their averages), and went overboard with the capital half of split shares to reduce and defer his taxes. His majority of holdings stayed



with his high dividend increasing every year, blue chip Canadian stocks that he knew.

The allocation of where his assets were held did change. The ’08 recession convinced him of the downside of RRSPs when many of his older family and friends lost considerable money with the mandatory withdrawals of the fallen value of holdings and no tax reduction credits for capital losses, or dividends. He experimented with electronic investing briefly but stayed with his regular broker who had been quite helpful as he was getting started. The advent of Tax Free Savings Accounts recently was maximized immediately for all his family.

As Will is pushing 60, he and Mary reviewed their retirement situation with a great deal of comfort and satisfaction. He strongly believed the family should have the same income, indexed to inflation, in retirement as before retirement. He was concerned about health and education costs for the family that now included three grandchildren plus retirement homes and hospitalization. Inflation had also reduced the purchasing value of their nest egg by over half since its start. With Will’s generous school pension and payments from their investments they were well fixed for retirement and security for the family.

When Mary raised the retirement allocation question, she mentioned the rule of age ‘the fixed income percent of holding should equal your age’. Will laughed at that as an outdated, over-cautious, maybe counterproductive belief. Will knew of a recent study showing present-day senior citizens had over half their financial holdings in fixed income – thus in dire financial straits now and for the future. Their 3-5% returns were barely covering their basic and constantly increasing living costs. In reviewing their own allocations they were 10% fixed income, 40% house and cottage, and 50% stocks—mostly Canadian blue chip plus some exchange traded funds, investment trusts, and a couple of mutual funds.

TaxationIt was obvious to Will after his early research that

taxation would be a most important determinant of wealth creation. The media were always pushing the buying and selling of stock and rarely talking about taxation. Will found a few excellent sources of up-to-date taxation information and read up on those that applied to his family situation and investments. Every year he also tracked the new rules including the changes in tax credits that decreased the money left for his pocket.

Will’s first move to gradually reduce his taxes by 50% was to divide his income with Mary who rarely had much

taxable income. He paid all the family bills including Mary’s income tax, if any, made yearly contributions to his wife’s RRSP and his daughters’ RESP, and maxed all Tax Free Accounts when they became available.

The second move was to differentiate among the sources of income and adjust them as the tax brackets and his income changed. Knowing the tax credits awarded to dividends and capital gains, he reduced his dividend stocks when they were taxed more than capital gains stocks earning about the same amount. For example, in 1988, the top tax rate for capital gains was 30.8% and Canadian dividends 31.2%. In 2014 capital gains were 24.8% and dividends were 32.8% making capital gains more attractive dollar for dollar. For mid-income investors in 2009, dividends were taxed at 6.9% but in four years the rate had gone up to 13.4%. This relatively unnoticeable tax hike was made by reducing the tax credit on dividend income. Will was now good at spotting these obfuscating moves of the federal and provincial governments and made the adjustments to minimize the effect on his portfolio.

Many of these adjustments made to reduce taxes were to defer taxes for as long as legally permitted by Revenue Canada. Will bought split shares of his blue-chip stocks that just held the capital half of the regular shares and the stock issue lasted for five years. At the end of the five years the issue could be rolled over tax-free for another five years and he could then use the usual tax money to make more investments and increase his wealth creation while lowering the tax brackets for his other income. This deferring of taxes is part of the ongoing advantages of capital – there are no taxes paid until you decide to sell the stock.

Will and Mary used the best place possible to start with not only deferring tax on investments but not paying any tax ever by buying a house shortly after their marriage with help from their parents. As mentioned previously, the three houses they bought were likely among the top investments they ever made. The relatively new Tax Free Savings Account also have this money-saving feature as they have no tax on yearly earnings or on eventual withdrawal. Real estate, gold coins or bars, art work and other collectables also defer taxation until they are sold and the Gardiners’ lakeshore lots and cottage fits into this tax deferment category. Will noticed that the 40% of his wealth in house and cottage saved 4.5% in taxes every year by keeping his income in a lower tax bracket. He and his family are quite content with the results and outcomes of his investment career.



MoneyTip

Comments on the Quick QuizMy personal opinions on the quiz are that the contented

investor would answer yes to all the questions. If $10,000 would make a significant change to your lifestyle, it is unlikely that you are contented and perhaps concerned about the present recession or financing your retirement. If you were following David Stanley’s “Beating the TSX” articles in MoneySaver, you could manage his 10 stocks in 3-4 hours each year and average well over 10% a year earnings. Most couples can reduce their tax to 20% of income by splitting income and other moves when they

do their own tax planning and returns [see Moneysaver, 6/13 P.8]. A clear indicator of the contented investor is having a money-making hobby or recreational pursuit as it shows a relaxed, fun and enjoyment attitude towards investing. (Now if you are uncomfortable at this point I’d suggest you review the Know Yourself paragraph. And remember these are just my ‘doing it over again’ opinions from my experiences.)

Hedley Dimock MA, Ed.D. Guelph, [email protected]

There is no shortage of advice and strategies to be a successful investor. This causes investors who are just starting out, or even those more tenured, to feel overwhelmed. Fortunately, many investors agree on the common pitfalls of investing; focusing on avoiding these mistakes is likely ‘half the battle’. There are of course other mistakes we feel every investor should be aware of, but the below points would be considered ‘building blocks’.

Without a doubt, the worst mistake one can make is to not understand the need to build an appropriate asset allocation. Asset allocation is the most important decision the investor will likely make in his/her life. Asset allocation means dividing up your capital among different investment classes (stocks, bonds, real estate, cash) in a manner that is appropriate to your investment goals, risk tolerance, and stage of life. Asset allocation protects you from a lack of diversification and overconcentration issues. In order to create a successful asset allocation, think of it as any good sports team. The best teams have both an aggressive offense and a strong defense. And, most importantly, the coach knows the strengths and weaknesses of each.

In building the proper asset allocation, most investors will seek help. Do not make the mistake of looking for a broker. Find a fiduciary instead. Brokers often work for large, name-brand firms that are working to make a profit. A fiduciary, on the other hand, is independent and free of conflicts (or, at a minimum, they must disclose any conflict). A true fiduciary advisor never receives commissions to sell you a specific investment.

To be a successful investor, you need to rebalance your portfolio at regular intervals. While this does not sound overly complicated, the psychological discipline it takes to actually do it is the challenge. When a portion of your portfolio is doing really well, it’s easier to assume successes will continue vs. making the decision to take some profit from a ‘hot’ investment. This is what causes people to stay with an investment too long and end up losing gains. Most investors rebalance once or twice a year. Some rebalance more frequently, but too frequently can hurt, as it doesn’t give a chance to “let your runners run.” The rules of rebalancing don’t guarantee you’re going to make the correct investment decision each time. Rebalancing does mean you are likely to make the correct decision more often than not, and that you have a portfolio that is appropriate for your investment objectives and risk tolerance.

Finally, do not invest without taxes in mind. Investors know that it’s not what you earn that matters, it’s what you keep. Taxes are a guaranteed erosion of capital that impacts the ability to create compounded growth. There is no good reason to pay more in taxes than you have to, and every reason to avoid unnecessary taxes. Seeking the opinion of a tax expert when building and maintain a portfolio is a wise choice as the proper advice can create significant value and added growth for the portfolio.

Source: https://www.CFAinstitute.org/learning/investor/Documents/twenty_common_mistakes.pdf

The Worst Mistake



https://www.CFAinstitute.org/learning/


Financial Living

Mortgage Tips For Buying Investment Properties

A s a mortgage agent, I frequently encounter clients who have an interest in buying an investment property to rent out, but are unsure how to go about obtaining

a mortgage for it, and don’t know which rules differ from financing an owner-occupied home. There are some similarities, but also significant differences, and with mortgage rules for rental properties changing over the past several years, it further complicates the matter. What applied to a buyer in the past may no longer be the case, and as a result, it can be difficult to know where to start. This article will discuss the process for obtaining mortgage financing on an investment property so you can better determine if it’s something you want to look into more closely.

To start with, the type of property first needs to be determined. Most lenders will classify a property with one to four units as residential. Anything more, or if there is a commercial aspect to the property such as a store front, will require commercial financing which is another discussion altogether. This article will discuss residential rental properties. Factors such as credit, income, down payment, property cash flow and expenses will be reviewed by the lender to determine if they will finance a mortgage on it. Let’s break down those points in more detail.

Lenders first look at credit. Just like with an owner-occupied home, when buying a rental property, the lender needs to ensure the borrower’s credit score and history are sufficient. Even if the property will have a positive cash flow through rental income, if credit is not up to par, lenders will not finance a mortgage. This also helps determine what other debts the borrower has as they would need to be factored into the overall decision.

The next area is income for the borrower. While the property will bring in rental income, lenders will need

Anson Martin

to see what other income is being generated outside of the rental. This will be discussed in more detail in the property cash flow section, but extra income could be required to offset debts the borrower may currently have. Some lenders will not allow a mortgage if the sole income is from the rents. Income is reviewed in the same manner as for an owner-occupied home, requiring a pay stub and employment letter, or by reviewing taxes for the past two years if self-employed. In addition to income, certain lenders require the borrower to have a sufficient net worth from assets such as savings and investments, or equity in another property.

Down payment is an important factor. The minimum down payment required for a rental property is 20%, much higher than the 5% minimum required for owner-occupied purchases. However, there will be a mortgage insurance premium (with CMHC, for example) added to the mortgage if financing is between 75-80% of the purchase price. Unlike owner-occupied homes, which only require 20% down to avoid an insurance premium, 25% is required for rentals. This can make buying a rental property more of a challenge due to the higher initial investment the borrower will need to come up with, but lenders require this due to the added risk that goes along with financing a property that is not occupied by the owner. A tenant may not care for the property the same way they would for something they own, thus affecting the property’s value; similarly, having a property sit vacant for too long may put a strain on making the payments so the lender requires a larger equity cushion to protect their investment.

The most complicated aspect is property cash flow and expenses, as this is where lenders have differing policies. Some lenders will use a rental offset which limits the amount of rent they recognize. Instead of including 100% of the rental income, they may only allow 80%



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(and some only 50%) which can significantly impact the overall numbers. If there is a surplus it can be added to gross income. But in some cases it may leave a shortfall when deducting the mortgage and property taxes, as well as factoring in the payments for any other debts the borrower may have. This is where it becomes critical to have additional income to make up for it. Other lenders use a debt service coverage calculation to capture cash flow and expenses. They will recognize 100% of the rental income, but also need to factor in additional expenses such as insurance, vacancy, maintenance and utilities, in addition to the primary expenses of mortgage payments and property taxes. Usually this method is a more accurate way of obtaining a net rental income, but not all lenders offer it. They also require the property to meet a minimum debt coverage ratio. Even though the property may have cash flow sufficient to cover its expenses, if it doesn’t meet the ratios, the lender may decline financing. In this case the only solution would be to lower the loan amount by increasing down payment.

While these are the main factors involved with financing an investment property, there are also several other points to keep in mind. A common situation I encounter occurs when a buyer is looking to purchase a property that they will occupy themselves along with a tenant. For example, the home may have a basement apartment they can rent out for additional income. However, unless the property is legally zoned as a duplex or has been legally converted to a multi-family property with proper retrofitting to meet building and zoning codes, lenders will not recognize any rental income from it. Nor will they recognize any rental income from individual rooms, or any other workspace such as a garage, shed or yard. This can make financing difficult if rental income is required to qualify for the

mortgage. If a property or unit is not currently rented, an independent appraiser may be required to give a market rent evaluation of the property. Most lenders also have a limit on the number of properties a borrower can own in their name (which is usually between four and six). Once this number is surpassed, options become very limited in obtaining financing. Interest rates can also differ for rental properties as not all lenders will offer the same low rates for a rental as they would for an owner-occupied property and may add a premium to the rate. Refinancing a rental property can be tricky depending on what documentation is required to verify the income it generates. Some lenders only require lease agreements while others will base rental income from what was declared in taxes over the past two years.

Owning a rental property takes proper planning, up-front investment, finding the right tenant and a long term commitment to managing the property. Remember the four main areas a lender will review for mortgage financing – credit, income, down payment and property cash flow vs. expenses. Search out other real estate investors to get their advice and ideas on how they manage their property. Speak with a knowledgeable mortgage professional who has experience with financing these kinds of properties. When executed correctly, a rental property can be a valuable part of your investment portfolio.

Anson Martin, VERICO – Fair Mortgage Solutions Inc. Anson Martin has been a Mortgage Agent with Fair Mortgage Solutions since 2010. During this time he has helped countless clients all over Ontario and Canada-wide with their mortgage needs, from first time buyers to real estate investors. (905) 541-3213 [email protected] www.ansonmartin.com www./fairmortgagesolutions.com

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Family Wealth Planning

US Voluntary Disclosure Program Updated

US citizens must file US personal tax returns no matter where they live in the world and

returns are usually required even if no US tax is payable. Currently, if your income exceeds $3,900 as a married taxpayer filing separately or $11,500 as a single taxpayer, you must file. Most countries only tax you if you live there but the US taxes on the basis of both residence in the United States and US citizenship no matter where you live.

US CitizenshipUS citizenship is a difficult concept. You will be a

US citizen if you were born in the United States and sometimes even if you were born outside the United States if one or both of your parents are US citizens. Your Canadian passport shows your place of birth so it will be a source of information to US border officials that you cannot hide. However, when you cross the border, by law, US citizens must show their US passport to legally enter the United States.

Streamlined FilingVoluntary disclosure allows American taxpayers to

avoid late and non-filing penalties (but not taxes and interest). US tax authorities will accept overdue 1040 tax and related returns and elections for a three-year period and will consider it a complete disclosure. Taxpayers must also file six years of FBAR (FINCEN Form 114) returns to report non-US investments and other financial accounts. The latest voluntary disclosure program is called Streamlined Filing.

The first official US voluntary disclosure program was effective September 1, 2012 and was followed by more changes which better defined the financial risk to the US Treasury, and the criteria that apply to meet program eligibility.

Ed Arbuckle

In a memo issued by the IRS on August 19, 2014, the Streamlined Filing procedures were further amended and simplified. Under the new program, US citizens only need to show that they reside outside the United States and sign a certification attesting to the following:

• I failed to report income from one or more foreign financial assets during the above period;

• I meet the non-residency requirements for the Streamlined Foreign Offshore procedures;

• I meet all the other eligibility requirements for the Streamline Foreign Offshore procedures;

• If I failed to timely file correct and complete FBARs for any of the last six years. I have now filed those FBARs;

• I agree to retain all records related to my income and assets during the period covered by my delinquent or amended returns;

• My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct; and/or

• I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties.

Taxpayers must also give a general explanation for their failure to report all income, pay all tax, and submit all required information returns. The income tax threshold and other risk assessments that existed under previous programs have disappeared. US citizens no matter how large their income or taxes can now join the streamlined program. A statement of reasons for not filing might read as follows:



I was born in Canada in 1975. My father was a US citizen and my mother was a Canadian citizen. Under US rules, I am considered a US citizen. I moved to Canada permanently in August 2000 and I have lived here ever since. I am fully compliant with my Canadian tax filing obligations. I was not aware that the basis for filing a US tax return is citizenship as well as residency. As soon as I became aware of my US tax reporting obligations, I had all required returns prepared to bring my US tax filings up to date. Three years of tax returns and related information returns have been filed as well as six years of FBARs.

The IRS published a further memo on October 9, 2014 providing more details about streamlined filing. Following are some of the more important things to take away from the October memo:

• US citizens and green card holders are eligible for streamlined filing if:

– They were present in the United States for less than 36 days in at least one of the last three years;

– They do not have a US abode (place of primary residence – social, economic and family).

• As part of the disclosure you must file:

– Three years of delinquent or amended tax returns;

– Three years of any relevant information returns (i.e. 3520, 5471 and 8938); and,

– Six years of FBAR returns (for which the filing deadline has passed).

• Failure to file, failure to pay and accuracy-related penalties will not apply unless fraud or willful neglect is involved.

The 36-day presence test will prevent snowbirds from taking advantage of the streamlined filing program.

Delinquent FBAR ReturnsAs part of the streamlined filing, you must submit

six years of FBAR returns. Severe penalties apply for not filing the FBAR (FinCEN Form 114) (both for willful and non-willful reasons) but may be waived if the taxpayer had reasonable grounds for not filing – providing six years of delinquent returns are filed along with an explanation (attached to each return) for not filing. The explanation should cover the following:

❑ All of the income from the accounts was reported on US tax returns;

❑ The taxpayer was unaware of the requirement to file the FBAR;

❑ The taxpayer promptly filed the return when they became aware of their obligation;

❑ The taxpayer relied on tax advice from a 1040 tax preparer and no such advice was provided;

❑ All of the accounts exist for legitimate purposes;

❑ No intended efforts were made to subvert the reporting of income or assets;

❑ The income tax has been fully reported and paid for all prior years; and,

❑ The taxpayer did not intentionally withhold the existence of financial accounts to the 1040 tax preparer.

Wording of the disclosure might read as follows:

As part of the streamlined filing compliance procedures the taxpayer is electronically filing her delinquent FBAR returns. She was not aware of her requirement to file FBAR returns until recently. She was born in Canada in 1975 and moved to the US in 1985. She moved back to Canada permanently in 2000. She has lived here ever since. She was not aware that the basis for filing a US tax return is citizenship as well as residency. She is current with her Canadian tax filing obligations. As soon as she became aware of her requirement to file FBAR returns she filed them.

Obtaining A Social Security Number (SSN)

You need a SSN in order to file US tax returns. To get a SSN you will need to complete Form SS-5 and provide supporting documentation to verify to the IRS your age and your identity, and to confirm that you are a US citizen. The name on your social security card must match your current name. If it does not match you will need to get a new card or tax returns will not be accepted.

The supporting documentation must be original documents. Here are some examples of acceptable documents:

1. Age: hospital record of your birth or passport.

2. Identity: driver’s license, passport, long form of marriage certificate and divorce decree.

3. Citizenship: any documents that show that you were born in the United States.

The SSN office will also require the following information:

1. Name and daytime phone number of a person



who could verify the length of time living in Canada—this can be family, but not children born after the move to Canada. The office calls right away, so the person needs to be available.

2. Proof of residence, such as a copy of a utility bill showing address.

3. Legal proof of any name change.

Social Security offices are only located in the United States.

Penalties For Delinquent ReturnsIf you are a US citizen, green card holder or deemed

citizen of the United States and you have not filed US taxes and other information returns you should do so

as soon as possible. Most penalties for failure to file are $10,000 or higher.

ConclusionUS citizens living in Canada who do not make use

of the Streamlined Voluntary Disclosure Program are making a big mistake. Canadian financial institutions are now required to report financial income to CRA which sends the information to the IRS. Your time is running out if you haven’t filed.

J. E. Arbuckle Financial Services Inc., Waterloo, Ontario. Phone: 519-884-7087 Email: [email protected]

Real Estate

Is Bigger Really Better?Leasing the Right Size and Shape of Commercial Space

So often, tenants come to The Lease Coach stating that they are not making any money because their rent is too high. Sometimes, this is a true statement but, more often than

not, the tenant has simply leased too many square feet.

We remember consulting to a client leasing 5000 square feet of space who couldn’t afford to pay the rent. When we checked with neighbouring tenants, it turned out our client was actually paying less per square foot than anyone else. It wasn’t the rent per square foot that was killing his business but the amount of area he had been talked into leasing by the landlord’s leasing representative. We regularly see this scenario: leasing representatives and real estate agents typically receive a commission from the landlord for signed lease deals (the incentive increases with a tenant signing for a longer term, agreeing to pay a higher rent or leasing more space); however, the unknowing tenant often signs the lease agreement and

Jeff Grandfield and Dale Willerton – The Lease Coach

becomes legally bound to the terms. Additionally, in most cases, a tenant will also be paying operating costs or common area maintenance (CAM) fees based on a square footage basis.

Occasionally, we deal with the reverse of this scenario. A tenant told us his space was too small. If we could expand the business, he could generate more revenue. We negotiated for this tenant to lease the adjacent space (which meant relocating the neighbouring tenant) and he achieved his goal. Landlords generally prefer to work with a tenant who wants to expand versus one who needs to downsize.

It has been our experience that the main reason commercial tenants end up leasing the wrong amount of square footage is due to availability…or lack thereof. If you need about 1,800 square feet for your business but the only two spaces remaining available for lease are



http://www.personalwealthstrategies.net


This column offers excerpts from published and online sources to provide other viewpoints.

FAIRFAX IS A DEFENSIVE HOLDING FOR 2016Investment Thesis:

Fairfax has been posting record underwriting earnings on the back of improved sector conditions in the US and, more recently, Canada. FFH’s recent investment performance has been lumpy but it remains well insulated against global market volatility with the potential for long-term bets on deflation to produce major gains in the coming years. The combination of strong underwriting fundamentals with downside protection makes Fairfax an attractive investment idea.

Highlights

• Holding Steady As Market Turmoil ContinuesMarket turmoil appears set to continue as a central theme heading into 2016 and FFH remains well positioned to face related challenges. Through Q4, a combination of hedged equity positions, rising US Treasury yields, and a decline in CPI-linked contract values likely resulted in muted investment performance. We forecast dil. EPS of $5.70 and BVPS of $405 for Q4.

• Q4 Brings Another AcquisitionOn December 22, FFH announced it had agreed to acquire 80% of Eurolife Insurance for EUR316 MM from Eurobank (FFH owns ~17% of Eurobank). Eurolife is the #3 insurer in Greece and has a strong track record of performance.

• Maintaining Buy Rating, Raising Target To C$800.00 From C$770.00

The combination of a defensive investment positioning and strong underwriting performance while also offering a hedge against continued Canadian dollar weakness makes FFH a solid investment pick for 2016.

Source: Cormark Securities

smaller and larger, you will have a dilemma. A smaller space often has less frontage as well. If you are running a retail operation, this results in giving you less storefront exposure.

When choosing between locations that are modestly too big or too small, commercial tenants should almost always decide which space is in the better location. With adjacent and very comparable units, we would normally advise the tenant to be more conservative and lease the smaller location. Tenants who tell us their location is too small are usually profiting but want to expand to increase their sales. Whereas tenants who tell us their location is too big often want to downsize to reduce rent payments as a means of improving their bottom line.

Consider also the functional shape of the premises for your business. In one situation, the landlord was expanding his strip mall, claiming that only one CRU (commercial retail unit) was left. Unfortunately, this unit housed a large utility room in the back – making that area unusable for almost any tenant. Since the expansion portion of the project was only in the construction phase, we suspected the landlord still had time to move other interested tenants around and we suggested to the tenant that we walk away from the deal as a negotiating strategy. As expected, within a few days the landlord reconsidered his position and predictably came up with a much better location for the tenant.

When it comes to leasing commercial space, choose wisely. If you have too large of a space, you may not only be paying too much rent, but you may not have enough inventory to fill it (therefore making your store appear emptier and less enticing to customers). If you have too small of a space, you may be squeezed in, and maneuvering around may become difficult.

For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to [email protected].

Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail [email protected] or visit www.TheLeaseCoach.com.




http://www.TheLeaseCoach.com

http://www.TheLeaseCoach.com


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Q With regard to capital gains, my question is:

• How long can you go back on a home to claim depreciation and work done on the home, if you have not done so (the home was sold in 2015 so will be a part ofthisyears’taxes).Ihadthehomeforapproximatelyfive years.

• Can you please confirm that closing costs such as real estate fees, real property report, and other such incidentals will reduce the capital gain.

• If my understanding is correct, I will be responsible for half of the gain with the taxation being around 39 to 50% and I can spread the gain over three years.

—CMSReader

A To claim depreciation (referred to as capital cost allowance or CCA for income tax purposes) on the total building portion of a house the property needs to be a rental property. Deprecation cannot be claimed on the land portion. Depreciation cannot be claimed on a “personal use property” such as house that you and your family simply live in.

Depreciation can only be claimed on the building portion of a rental property to the extent that the depreciation claim does not cause or increase a rental loss. So, if the rental property has a net rental loss before any claim for depreciation is made, a claim for depreciation is not available in that year.

If a portion of the house is rented – or a portion of the house is used to carry on a business – a partial deprecation claim can me made. However, this will taint a claim for a principal residence exemption when the house is sold.

With respect to amending a personal income tax return there are provisions in the Income Tax Act that can be used to permit an amendment as far back as ten years.

You must accompany your inquiry with your Membership Number (ID) and telephone number or e-mail to have your question reviewed. Inquiries are responded to directly and the Q&A may be published here later. Hundreds of Q&As are found on www.CanadianMoneySaver.ca

As you note closing costs - such as the real estate commission, legal fees, etc. - should all qualify as “selling costs” which reduce the capital gain subject to income tax. I am not sure what you mean in respect of a “real property report”. Presumably, it was needed to advertise and/or conclude the sale so it should qualify as a legitimate selling cost.

Also, as you note, only half of the capital gain is subject to income tax. You mention that this gain will be spread over three years in your case. I assume this is because you will receive the selling proceeds over three years as you have accepted a three year promissory note as all or part of the consideration or have provided a three year vendor take back mortgage. If you received all the selling proceeds in 2015 you cannot defer the tax over three years – all the tax will be payable in respect of 2015. The actual tax payable in 2015 (or 2015, 2016 and 2017) will depend on your overall taxable income in those years and what tax bracket you end up in.

Brian J. Quinlan, CPA, CA, CFP, TEP, Partner Campbell Lawless LLP, Chartered Professional Accountants 416.364.0702, ext. 230 [email protected]

Q I saw on your 'Estate and Will Planning' webinar that probate fee does not apply to assets distributed by beneficiary designation. Does this mean that with my RRSP and Pension where I have designated beneficiary, I should not include these assets in my will to avoid the probate fee?

—CMSReader

A Although I am going to sprinkle my answer what lots of ”ifs”, “ands” and “buts”, most people do end up using beneficiary designations outside of their Wills to distribute their registered plans. Although this works really well in some situations, it doesn’t in others. As I said in my seminar, however, probate fees are like

http://www.CanadianMoneySaver.ca

http://www.CanadianMoneySaver.ca




paper cuts – annoying but seldom fatal. There are often more important issues for many of my clients at death, such as income tax planning and covering off more risks and contingencies than allowed using the basic forms provided by investment companies. When gifting to a surviving spouse, using the forms provided by the company holding your registered plans can work well, although my preference is to designate the spouse as the “successor holder” of TFSAs and the “successor annuitant” of RRIFs rather than naming them as a beneficiary, as this means that you don’t have to collapse the deceased’s account and trigger the related costs in that case but also provides a tax-free rollover. In this case, you’d name other people to be the beneficiary to inherit if there is no surviving spouse around at that time.

For larger registered accounts, situations where you have young, disabled, financially troubled, divorcing or even high income children who could benefit from income splitting (by leaving the proceeds to a trust that allows the beneficiary to also share and report income / gains if the inheritance is invested in an open account on typically no or low income children’ tax returns), you might look at either using your Will to gift these assets or leaving them in a trust outside your Will. Leaving the assets to a trust outside your Will can cost more money but can combine the benefits of using the basic beneficiary designation forms: probate fee avoidance, privacy, less exposure to the deceased’s creditors and will challenges, and speed with the benefits of providing more detailed instructions regarding the money found in Wills: ability to keep the money in trust to protect the types of heirs already discussed, ability to cover off more contingencies if people die in the wrong order and the ability to create income tax savings from beyond the grave just described. For larger accounts, the set up fees of this extra trust can be less than one year’s management fees for a low-cost mutual fund but the benefits can be far more profound and long-lasting.

The biggest risks of using the beneficiary designation forms are:

• If you name three adult children with children of their own as joint beneficiaries and one dies before you can change your beneficiary designation form, then the other 2 would inherit all. This means leaving out the deceased’s children.

• For RRSPs and RRIFs, the tax bill for these assets isn’t paid by the beneficiary but by the estate. If people die in the wrong order, such as in the example in

the previous bullet, then not only would some heirs end up getting more than you’d intended, the others who were left out would actually lose twice, as their share of the rest of the estate is net of the tax bill on the RRSPs and RRIFs they didn’t receive.

• As an exception to the last bullet, if RRSP and RRIF money is left to minors, the proceeds are taxed in their hands. For example, if a RRSP worth $1,000,000 is to be split evenly between the deceased’s 19- and 17- year-old children, with the rest of the estate divided the same way, then the older one would get $500,000, as the estate would pay the tax on that portion, while the younger would lose twice. He would have to report his $500,000 on his own return and his 50% of the estate would be reduced by 50% of the tax bill on his older sister’s portion of the RRSP.

• The inheritance being squandered by paying it directly to an inexperienced or poor money manager (i.e. a 19-year-old child), someone with addiction or health issues or who has creditors who could ultimately seize the inheritance.

• If a minor inherits a registered plan directly, this money would need to be held by the Public Trustee in B.C. and likely a similar office in other provinces. Although B.C. law now lets people appoint a trustee for minors on the simple form to avoid this issue, this still means the child gets whatever is left at 19 without restrictions as just discussed.

• Although the right person inherits, they die shortly after you and the money goes to the wrong person then. For example, rather than going to your grandchildren, what’s left of your deceased child’s share of the RRSP goes to her second husband per her Will rather than your grandchildren from her first marriage.

Anyway, this is a rather long answer to a short question. In the end, the safest course is to use trusts, either inside the Will (unless there are creditor issues or the chance of Will challenges) or outside if you have larger registered plans or are looking for tax planning from beyond the grave. In reality, most people just use the forms.

Colin S. Ritchie, LL.B., CFP, CLU and FMA is a Vancouver-based fee-for-service lawyer and financial planner who does not sell investment or insurance, just advice. To find out more, visit his website at www.colinsritchie.com

http://www.colinsritchie.com



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ld G

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38

CH

ART

NO

TES

For

info

rmat

ion

on t

he c

ateg

ory

defi

niti

ons,

ple

ase

visi

t ht

tp:/

/ww

w.c

ifsc

.org

/en/

inde

x.ph

p. F

ront

loa

d fu

nds

(Frn

t) c

harg

e a

fee

to i

nves

tors

whe

n un

its

are

purc

hase

d; d

efer

red

load

fund

s (D

ef)

char

ge a

fee

whe

n un

its

are

rede

emed

. Fro

nt lo

ads

may

be

redu

ced

(in

per c

ent

term

s) a

s th

e si

ze o

f the

inve

stm

ent

incr

ease

s;

defe

rred

load

s m

ay d

ecre

ase

as t

he t

ime

elap

sed

betw

een

purc

hase

and

rede

mpt

ion

leng

then

s. S

ome

fund

s ha

ve e

ithe

r a fr

ont

load

or a

def

erre

d lo

ad (

FnDf

). O

ther

s

have

no

load

fee

(Non

e). D

efer

red

sale

s ch

arge

s al

so k

now

n as

a b

ack-

end

load

, the

se d

efer

red

char

ges

typi

cally

go

dow

n ea

ch y

ear y

ou h

old

the

fund

, unt

il ev

entu

ally

they

reac

h ze

ro. D

efer

red

sale

s ch

arge

s gi

ve in

vest

ors

an in

cent

ive

to b

uy a

nd h

old,

as

wel

l as

a w

ay t

o av

oid

som

e sa

les

char

ges.

n Y

ear R

etur

n -

The

aver

age

annu

al

com

poun

d (a

nnua

lized

) ra

te o

f ret

urn

the

fund

has

per

form

ed o

ver t

he la

st “

n” y

ears

. It

assu

mes

rein

vest

men

t of

any

div

iden

d or

inte

rest

inco

me.

1 Y

ear R

etur

n (Y

r

endi

ng D

ecYY

) -

An a

nnua

l ret

urn

is t

he fu

nd o

r por

tfol

io re

turn

, for

any

12-

mon

th p

erio

d, in

clud

ing

rein

vest

ed d

istr

ibut

ions

. Tax

Eff

icie

ncy

- Ca

lcul

ated

by

divi

ding

the

fund

’s t

ax-a

djus

ted

retu

rn (

pre-

liqui

dati

on)

by it

s pr

e-ta

x re

turn

, and

can

onl

y be

cal

cula

ted

whe

n bo

th p

re-t

ax r

etur

ns a

nd t

ax-a

djus

ted

retu

rns

are

posi

tive

.

Dist

ribu

tion

Fre

quen

cy -

The

inte

rval

at w

hich

regu

lar c

apit

al o

r inc

ome

divi

dend

s ar

e di

stri

bute

d to

fund

uni

thol

ders

. Yea

r end

Qua

rtile

s - T

he q

uart

iles

(1 to

4)

give

the

indi

vidu

al fu

nd it

s po

siti

on re

lati

ve t

o al

l oth

ers

in t

he fu

nd t

ype

cate

gory

. For

exa

mpl

e, if

the

fund

’s q

uart

ile v

alue

is “

1” fo

r the

Dec

201

0 ye

aren

d, t

his

mea

ns

the

fund

’s ra

te o

f ret

urn

for t

he 1

2 m

onth

s en

ding

Dec

31,

201

0 is

in t

he t

op 2

5% o

f all

fund

s in

its

fund

typ

e ca

tego

ry.

Source-MorningstarPalTrak,M

orningstarCanada,(800)531-4725,http://www.m

orningstar.ca.


http://www.cifsc.org/en/index.php







http://www.morningstar.ca





Specialty ETFsTOP EXCHANGE TRADED FUNDS RANKED BY FIVE-YEAR RETURNS AS OF JANUARY 14, 2016 Fund Name Ticker Mkt Tot Return

YTD(Current)

Mkt Tot Ret 1 Mo

(Current)

Mkt Tot Ret 3 Mo (Current)

Mkt Tot Ret 12 Mo

(Current)

Mkt Tot Ret 3 Yr

(Current)

Mkt Tot Ret 5 Yr

(Current)

Mkt Tot Ret urn Since Incept

(Current)

HorizonsBetaPro NASDAQ 100 Bull Plus ETF HQU 13.60 -3.78 20.07 13.60 41.39 29.40 -

HorizonsBetaPro NYMEX Crd Oil Bear+ ETF HOD 80.29 31.85 57.02 80.29 50.88 21.45 -

BMO Eq Wght US HlthCare Hdgd to CAD ETF ZUH 6.77 1.71 8.56 6.77 27.33 20.88 -

HorizonsBetaPro S&P 500 Bull Plus ETF HSU -2.61 -3.89 13.25 -2.61 27.31 20.07 -

Horizons S&P 500 ETF HXS 20.25 1.91 11.06 20.25 27.15 19.13 19.82

iShares US Fundamental Adv CLU.B 13.50 2.15 10.41 13.50 26.23 18.87 18.80

iShares US Fundamental Comm CLU.C 16.84 3.13 11.16 16.84 27.34 18.52 19.69

BMO NASDAQ 100 Equity Hedged to CAD ETF ZQQ 9.08 -1.51 9.99 9.08 21.30 16.57 17.40

HorizonsBetaPro NYMEX NatrlGas Bear+ ETF HND 54.39 -15.21 37.40 54.39 0.29 15.59 -

BMO Global Infrastructure ETF ZGI -4.05 -2.31 -1.46 -4.05 15.26 15.47 15.57

iShares Global Water Comm CWW 16.60 -0.65 9.66 16.60 21.16 14.67 6.01

iShares MSCI World XWD 17.42 1.38 9.12 17.42 22.12 14.32 13.81

iShares Global Real Estate Comm CGR 20.73 5.22 8.93 20.73 17.20 14.30 8.52

iShares Global Water Adv CWW.A 17.36 1.50 11.91 17.36 21.09 14.18 5.34

Horizons Active Global Dividend ETF Comm HAZ 17.73 1.85 10.13 17.73 21.03 14.15 -

First Asset Core Canadian Equity Inc ETF CSY 148.03 -4.17 196.47 148.03 32.00 14.06 13.33

HorizonsBetaPro S&P/TSX Cap F Bull+ ETF HFU -10.91 -7.02 2.08 -10.91 18.51 13.66 -

iShares Global Real Estate Adv CGR.A 18.95 5.38 9.28 18.95 16.30 13.20 7.72

iShares Japan Fundamental (CAD-Hdg) Adv CJP.A 6.10 -2.57 9.10 6.10 29.33 12.62 -3.61

iShares S&P/TSX Capped Info Tech XIT 14.21 1.47 10.58 14.21 28.69 12.32 1.62

BMO S&P 500 Hedged to CAD ETF ZUE 0.23 -1.75 7.13 0.23 14.95 12.09 -

iShares Core S&P 500 (CAD-Hedged) XSP 0.54 -1.97 6.59 0.54 14.90 12.00 2.28

First Asset Canadian REIT ETF Common RIT 15.26 -1.55 1.18 15.26 7.83 11.16 -

iShares Japan Fundamental (CAD-Hdg) Comm CJP 9.42 -3.45 6.29 9.42 21.77 11.12 -3.04

BMO Dow Jones Ind Avg Hdgd CAD ETF ZDJ -0.63 -1.37 7.66 -0.63 12.31 10.67 -

iShares US Fundamental (CAD-Hedged) Comm CLU -4.07 -1.70 6.25 -4.07 13.59 10.63 4.60

iShares US Fundamental (CAD-Hedged) Adv CLU.A -5.26 -1.66 5.40 -5.26 13.01 9.89 3.84

iShares US Small Cap (CAD-Hedged) XSU -5.14 -5.07 3.41 -5.14 11.76 8.82 3.33

iShares Equal Weight Banc & Lifeco Comm CEW -2.38 -3.86 2.23 -2.38 12.54 8.77 6.56

iShares S&P/TSX Capped Financials XFN -3.71 -3.25 1.52 -3.71 10.73 8.60 8.86

iShares Global Agriculture Comm COW 4.22 1.58 9.39 4.22 13.37 8.45 6.95

BMO S&P/TSX Equal Weight Banks ETF ZEB -6.06 -3.84 0.40 -6.06 8.80 8.37 9.72

iShares International Fundamental Comm CIE 12.43 1.12 6.13 12.43 14.89 8.04 1.13

iShares Equal Weight Banc & Lifeco Adv CEW.A -3.33 -3.55 2.62 -3.33 11.90 7.95 5.68

iShares Global Agriculture Adv COW.A 4.00 2.43 10.02 4.00 12.79 7.69 6.19

First Asset Active Util & Infra ETF Comm FAI -2.04 0.35 3.38 -2.04 8.66 7.68 -

Horizons Seasonal Rotation ETF Comm HAC 9.68 -0.48 2.71 9.68 9.53 7.62 8.54

BMO China Equity ETF ZCH 20.40 4.19 21.30 20.40 21.87 7.57 8.35

BMO Eq Weight US Banks Hdgd to CAD ETF ZUB -2.65 -2.55 5.96 -2.65 14.11 7.51 -

iShares International Fundamental Adv CIE.A 13.02 3.53 10.32 13.02 15.30 7.37 0.53

©2015 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, (2) may include, or be derived from, account information provided by your financial advisor which cannot be verified by Morningstar, (3) may not be copied or redistributed,(4) do not constitute investment advice offered by Morningstar, (5)are provided solely for informa-tional purposes and therefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supple-mental sales literature. If applicable it must be preceded or accompanied by a prospectus, or equivalent,and disclosure statement.


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