Reminder to those who use TFSAs

It's almost end of the year, if you plan on withdrawing money out of your TFSA temporarily for a specific purpose, do it in December otherwise you will end up having to wait another year to get the contribution room back.

This is especially important for those of you that plan on paying your December credit card bills in January with money withdrawn from your TFSA. With all the holiday sales out there right now, it becomes very easy for us to end up spending more than what we have in the bank. It is little things like that sometimes that gets you! BUT since I know you are all such prudent folks, you will probably not need to take out money to cover your bills in the first place, because you would have kept enough floating cash in the bank. See, another reason to keep a safety net in your bank accounts.

How easy it is to end up in the above situation you ask? Easy enough, Johnny enters his nearby electronics store and sees a beautiful LED flat-screen. MSRP normally is $2,999, now it's on sale for $1,999. With such a great deal he bought it with his VISA card, it is now January 21st 2014 and his bill is due, combined with the typical monthly expenses and Christmas gifts he bought his bill is at $3,300. Although he keeps a $1,000 in the bank at all times and makes $3,200 a month after taxes, he only has $2,100 available after his car payments, insurance, and mortgage. Now we are looking at a shortfall of $1,200 ($3,300 – 2,100) that needs to be covered from somewhere.

-TT

P.S. - If you have not taken advantage of TFSAs, do it! It doesn't have to be an actual savings account!

The Ever-Present: Fraud

It is something we all hate to deal with, yet many of us don't seek to educate ourselves on it. There are of course many types of frauds out there and I won't attempt to list them all, criminals are so innovative these days I reckon there are probably several new schemes created everyday! Some of them are not so ingenious, they will simply try to trick you into meeting them and beat you with a baseball bat before taking your wallet. *cough cough* Kijiji... 

Most of the schemes are quite obvious, but some of them aren't. Here's a good website I came across loaded with information you should check out when you have time. I believe there is even a video interview in there with the Better Business Bureau (BBB) in one of the pages. They actually had a TV series at some point a few years ago.

http://www.fraudsquadtv.com/index.php

On a side note, unrelated to this page: beware of a new type of computer virus. This one mimics a legitimate Adobe/Chrome update and it looks quite real I must admit! As much as I hate giving them credit for their work ;) Read more/screenshots here: http://www.zdnet.com/fake-chrome-adobe-flash-updates-7000022123/

Key things to look for in a phishing type virus setup:

• Spelling errors
• URL or "address bar" may display an address contrary to the expected
• If it throws a bunch of error messages at you with messages that are meant to intimidate you into installing something
• Logo looks odd, like the fake Chrome logo in the above picture
• If you won simply by visiting a website
• If you have to open a document and it has an ".exe" file extension

Let's practice safe browsing!

-TT

FREE Course on Value Investing

Sorry for the long interval between articles folks, I have been extremely busy lately... to make it up to you all, here's a free course I found on Value Investing. The course videos will also introduce you to the idea of stock markets, how to evaluate a company to see if it's worth your money, along with other useful topics.

Here's the link, I have not gotten a chance to go through the whole course yet but it does work and all you have to do is set up an account with Udemy. No hidden fees as far as I know, and I don't make any money off this for those who may be wondering!

https://www.udemy.com/value-investing-code/?sl=E0IfdV5SVw%3D%3D

In case you haven't been paying attention to the market conditions, it seems the stock markets are rising and will continue to do so for quite a while. Sure there may have been speedbumps along the way with every announcement or minutes released from Bernanke in the past, but it always recovers each time. The market is clearly feeling more confident about the future. It is time to learn about stock investing! 

-TT

Clean, Super Clean, Ultra Clean...

Alright so I think it's time I start spreading the word out there, higher octane DOES NOT necessarily equal better performance NOR is it always equal to treating your car's engine! Use what your vehicle is rated for in its owner's manual.

What Is Octane Used For?

Long story short, it is used to prevent fuel from igniting too early and at the wrong time. Due to sophisticated engine technology nowadays, some are designed to operate under higher compression in order to get more power. A problem then arises, when the fuel is compressed too much it may ignite itself too early. When it ignites at the wrong time, you end up with a variety of problems such as blown pistons, "pinging" noises, and bent or even melted valves inside the engine! For those less technically inclined, it means major bad news! The higher the compression of an engine, the higher the octane it requires in order to resist unintended ignition.

What Happens When You Put A Higher Octane Than Required?

Very likely you will get LOWER performance, because it is now harder to ignite the fuel since high octane fuel is designed to operate in a higher compression situation. You may feel like your engine is smoother, but that's because the ignition isn't as powerful as it should be. To add insult to injury, your electrical system takes a toll because the car's computer has to force the spark plugs to work harder to make that ignition happen, by sending more electricity to the spark plugs. Oh and of course, your wallet suffers too because it means you spent a whole lot of extra money for nothing.

But Isn't Higher Octane Fuel "Cleaner"?

Reality is, all grades of fuel have enough additives to keep your engine clean based on standards set by the Canadian General Standards Board (CGSB). If you are in the States, the same holds true due to requirements by the U.S. Environmental Protection Agency. Basically, there is no need for "cleaner" fuel and what you should be concerned about is not whether it cleans, instead you should be concerned about whether it has the octane rating you need given the compression of your engine to prevent damage (see your owner's manual).

Please don't buy into those marketing hype folks, it truly is a waste of money! Still not convinced? Want a legitimate source? Here you go

http://www.consumer.ftc.gov/articles/0210-paying-premium-high-octane-gasoline

http://www.cbc.ca/marketplace/episodes/2012/11/pump-facts.html

Have a great weekend!

-TT

Looking For A Job? Beware Of Scams!

This article was actually inspired by something I read from the Metro paper yesterday, and it reminded me of a few of my friends back in our high school and just-entering-university days. A few of us actually came across positions and job agencies that were legitimately advertised in the paper and online but turned out to be hogwash. Note: This article is probably more appropriate for newcomers in Canada or for the younger generation trying to obtain their entry level positions.

Of course, none of these scam artists are going to give you a clear disclaimer of liability, so here are some hints and telltales:

1. They ask for an upfront fee: In many cases, legitimate service providers will not charge you upfront. Most of them will charge you based on the pay rate you get from the job they successfully setup for you. In some of these cases, the fee is hidden because the way it works sometimes is that employers use these service providers and will offer to pay a set price per hour, but then the employment agency will turn around and give you a lower rate per hour, thereby pocketing the difference as their service fee. Either that, or they charge a percentage of what you have earned during the first year or other similar arrangements.
2. They ask for referrals before successfully getting you a job, indicating they will pay you a referral fee. Hmm, starting to sound like a pyramid scheme doesn't it?
3. If you were hired as a salesperson, and they want to charge you for their demo kit or demo products of which you require for sales meetings. Essentially they are just forcing people to buy their products.
4. This one is a given – If they have terrible ratings on employer rating/review websites, and negative feedback on online forums.
5. Management have a hostile attitude, taking the approach of scaring you into not voicing your concerns to them. They figure by bullying you and having you afraid of them, you won't bring up concerns over being short hours on your paystub. That brings me to another point, ALWAYS keep a log at home recording all the hours you have worked, preferably with exact sign in and sign out times. This will come in handy when you need to discuss with management over short hours.
6. The agency promises suspiciously high payouts: Keep your expectations grounded and you should be able to avoid this one. Don't expect $55,000 starting if you have just graduated high school, those kind of jobs are almost non-existent. Though I have heard being a miner pays a lot out in rural areas...hmm. 

Anyway, if it seems too good to be true it probably is. Keep your hopes high, but keep a level head and don't get caught up in their promises. ALWAYS BE SKEPTICAL, a lot of legitimate ones out there but there are bad apples. It's like buying a used car, you don't know which one is a lemon so you will have to assume they all are until you have evidence proving otherwise ;)

-TT

Wakeup Call...

For those who are considering using debt to make your next big ticket purchase, think again! Just found a video from the Financial Post, showing you just how much the cost of debt really is. The problem is, financial institutions/retailers will implement all these tricks like introductory rates, smaller minimum payments, and even tell you that you don't have to pay for the first X number of months just to make a sale. What they don't make obvious, is the fact that the interest on the principal you owe is being compounded and you're paying a lot more interest than you have to because of the smaller minimum payments! Those plans sound more attractive than they really are.

APR% rates are frequently advertised but most will not show you the effective annual rate nor the sample interest calculations. To demonstrate how costly these payment plans can be, here's a video with numbers:

http://www.youtube.com/watch?feature=player_embedded&v=FGCAKyuXR6A

We all use debt every now and then, in varying amounts...hopefully neither of us will ever have to use those ridiculous minimum payment plans! The only way I would say use it, is if you actually have the money to make the purchase immediately but you are choosing to borrow because you are fairly certain that you can make more with your investments than the interest you are paying.


-TT

Fuel & Tires - Round And Round We Go!

Fuel economy seems to be the biggest rave lately. We have seen crazy ideas in the past few years, everything from low rolling resistance tires to a hybrid Porsche! (Porsche 918 Spyder for those curious individuals out there) There's even been studies conducted that shows you would save more gas using the A/C instead of opening the windows once you exceed 80 km/h (about 50 MPH) due to wind resistance.

Going back to low rolling resistance tires though, are they really worth the extra dollars? If you look at my chart below, the Michelin Energy Saver All-seasons cost a whopping $230 more than the regular OEM-equivalent replacement all-season tires - Bridgestone Insignia SE200's. For the purposes of comparison in this article, we will be looking at the prices from Canadian Costco only. The MPG figures are based on a 2009 Toyota Prius, fuel economy data were grabbed from a report on Tirerack.com (a reputable online retailer of tires and car parts/products based in the USA, link below). I have made my best guess for the missing numbers based on the Tire Rack numbers, these estimated figures are denoted with a "?" after the number.

The short answer is, yes the low rolling resistance tires do offer you enough of a benefit to offset the extra costs in purchasing the tires. Performance of these low resistance tires is also not a problem because the difference won't be noticeable if your driving is not too "spirited". It's been said that the earlier generations of low resistance tires encountered poor wet surface performance, based on the reviews and articles on Tire Rack it seems to have been fixed in later editions of low resistance tires.

Here's the chart from my calculations based on the prices ($CDN) from Costco and the test data from Tire Rack:

  * Ignore the grey...it's just the extra information not used

  

Please be aware that the last two rows are regular all-season tires, the first three rows are the low rolling resistance tires. The Bridgestone Ecopia EP100 is a summer low resistance tire, and the EP422 is the all-season version. The Bridgestone Insignia SE200 is the tire I used for base comparison, since it is a regular all-season tire just like the Goodyear Integrity I have assumed the MPG figures for those two will be the same if not very similar. I had to use the Insignia tires for my calculations because unfortunately Costco in Canada doesn't carry the Goodyear's. Ideally I would've used the Goodyear for my calculations because that's the tire used in the Tire Rack tests.

Focusing on the last two columns in my chart – highlighted in green, you will see that the fuel savings over five years far exceeds the extra costs for the tires. The time frame of five years was chosen because either one of two things will happen: 1) the treads are worn, or 2) the rubber is near the end of its useful life and large cracks are presents.

Wait! These fuel consumption numbers are from a Prius, will it apply to other cars?

You can use the same calculations but make sure you keep the ratios the same. So in here we see that the Michelin's fuel consumption is 0.892 times of the regular Bridgestone Insignia all-seasons, use that same factor for your car's current fuel economy data (e.g. 7.5 L/100KM) and recalculate the litres per year and dollar amounts. The conclusion should be the same and actually, the less fuel efficient your car is compared to a Prius, the bigger the net savings you should realize because the price of the low resistance tires are fixed but the fuel savings will grow with fuel consumption. Don't believe me? See the chart below. The fuel consumption numbers highlighted in yellow are the extrapolated numbers. Now the ratio method of extrapolating data isn't as accurate as real test data done with your car but you likely won't find data specific to your car online, this is the most logical method given the constraints of information.

 * Ignore the grey...it's just the extra information not used

Well there you have it folks, get low rolling resistance tires the next time you replace your tires!

Tire Rack test figures: http://www.tirerack.com/tires/tests/testDisplay.jsp?ttid=121

Have a wonderful weekend everyone, sorry I haven't been able to update this blog as frequently...things have been quite busy lately.

-TT

Is Early Retirement Possible?

Early retirement, who wouldn't want that! Here's an article I just read from the Financial Post:

http://business.financialpost.com/2013/06/01/extreme-saving-setting-a-retirement-goal-of-age-35/

This family of five wants to retire by age 35, quite an aggressive goal. It's highly improbable given the sacrifices they have to make on their quality of life, but I guess if you're disciplined enough it could be possible. Moral of the story is, cut back on unnecessary expenses and save every penny! Oh and of course, start early...as early as you can and let the power of compounding work for you. Now I am not suggesting you forgo your beers folks, woah woah woah let's not go overboard here but instead of kicking back a few pints at a pub, why not drink at home instead? Bottled beer may not taste as good as tap but it sure isn't watered down like in most pubs nowadays, and it's cheaper than going out for drinks. 

For fun, I have quickly put together a rough estimate of what you can expect to save up between you and your partner living under the same roof for 21 years. Yes yes...I know, it's the year 2013 and relationships might not last that long...but I assume you will find another partner at some point. Note that because these are rough figures, I didn't take into account the fact that you may need to buy replacement vehicles within the 21 years. Instead of breaking out the major maintenance items for the cars, I just lumped those costs into the row called "discretionary/misc". Also, be advised that I have made an assumption that both you and your partner would've saved enough to afford the down payment on the mortgage by age 24. Based on what I have saved up so far and it's just me alone, it is definitely possible!

Looking at this chart, it certainly seems possible you can retire between age 40 to age 50. It would probably be closer to age 50 if you factor in the cost of having children, and the cost of replacement vehicles during those years. The mortgage would've been mostly paid off at that point and with half a $million per person, combined with post-retirement investments on that $500k, your CPP, and company pension plans (if applicable) it is definitely doable. If you choose to have children and they turn out to be somewhat successful in their lives, you might not even need to put away that much for retirement! 

Bottom line is, for an early retirement to be possible it is necessary to be disciplined when it comes to saving. Keep track of your expenses and make a plan to save, don't just save whatever is leftover, make saving a priority as oppose to a "catch-all category". Tell yourself you need to save $ X each month and use calculations to forecast your retirement savings. It's never too early to start retirement saving!

-TT

That Time Of The Year Again!

Now that it's moving season, I figure this should be an appropriate time for this article! Just finished post-secondary and accepted a job offer? Dying to move out and become independent? Being able to live in a "nag-free" environment and having personal space is probably the dream of most new graduates, but is it wise and is it doable? – That's where a lot of them fail to consider thoroughly. I have actually encountered at least one person who had to move back home after her one year lease because she realized she could not afford it. She even took on a second job to help pay for everything.

Here are some "hidden" costs that may seem obvious to some but sometimes not considered:

• Cost of having your own car instead of using your parents' car, paying for your own gas, monthly parking space charges at the condo you are renting, and expenses related to maintenance. Surprisingly a lot of rental units do not come with parking, the landlord rents it out to other residents that require an additional space. You might end up renting the condo unit from one landlord and renting a parking space from another owner. 
• Additional food costs, due to A) not having your parents cook for you or fill the fridge with groceries, and B) you will be working a lot and so you can expect to order takeout more frequently.
• Shared utilities cost: you will now be paying for your own internet and cable most likely, hydro bill on the other hand will probably be covered by your landlord depending on who you rent from. Cable bill may not be that big of an issue since a lot of us stream or watch TV online.

So the above list should help in identifying whether it's doable, you will have to run some numbers for the condo you plan on renting. Now is it wise to move out right away? To be on the safe side, it may be safer to accumulate a sum of cash before moving out. You would then invest this cash while using it as a safety net in case anything unexpected happens, eg. your car might need repairs. There's a general rule of thumb, you should have enough cash to cover 6-months of expenses as a safety net. Depending on how risk averse you are, you could add to that time period of course. In fact, I believe you should have enough cash to cover all your expenses for as long as you will need to take to find another job in case this one fails. This means that it could be longer than 6 months depending on your career field.

Side note: Did you move at least 40km closer to your new employment location? You may be eligible to deduct moving expenses against your income for Canadian tax purposes. More information on what expenses are eligible can be found here:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/

Happy Canada Day folks! 

-TT

June and beginning of July...

Hope you are all doing well folks! Sorry I haven't been able to write as much for June, it's one of the busiest months for me at work (my actual/real job at an international SR&ED tax firm). Hopefully I can start churning out articles more frequently starting mid-July.

To give you something to look forward to, I will be interviewing at least one CPA somewhere around the end of July to the beginning of August. Topic hasn't been decided yet but I'm thinking something on entrepreneurship...hmmm or maybe taxes. Guess you will have to wait and see!

All the best,
TT

Tax Free Saving Accounts (TFSA)

Contrary to its name, it doesn't have to be a savings account! In this article I'm going to explore the TFSA with you, going in-depth to give you a bit more information. It seems a lot of folks are still confused about their contribution limits and how it works. According to an article I have just read from Google Finance, "the Canada Revenue Agency recently sent 65,978 mailouts to taxpayers who apparently put too much money into their TFSAs in 2012." 

The penalty of over contribution is 1% per month of which your total contributions exceed your available contribution room. The CRA will calculate the tax penalty using the highest overage each month in applying the 1%.

The TFSA mechanism was introduced in 2009. For the first four years, $5,000 of new contribution room is added annually each year. For the year 2013, that annual contribution room was bumped up to $5,500 in order to reflect inflation. If you recall from one of my previous articles, the TFSA contribution room will only move up in $500 increments when adjusting for inflation, so you won't see an increase every year unless the inflation was large enough. Your contribution room accumulates starting from the later of the year you turn 18 years old or 2009. Here's an example:

Billy Jean turned 21 years old in the year 2009, it is now 2013 and assuming he has never contributed into a TFSA, how much does he have available for his contribution room? ... He has $25,500! ($5k x four years + $5,500 for 2013)

What if he turned 17 years old in the year 2009? Then he would have $20,500 because he wouldn't have accumulated the $5,000 in 2009.

What can you invest in?

Despite its name, it doesn't necessarily have to sit in a savings account. In fact the name TFSA is more like a tag you add on to a type of investment to indicate that it is being treated differently for tax purposes. You can have a TFSA for mutual funds, stocks, bonds, and GICs (although I dislike GICs!).

Key things to note:

• If you're not a Canadian resident or a "deemed Canadian resident", you cannot setup a TFSA
• Whatever you contribute is not deducted from taxable income in your tax returns
• Consequently, whatever you take out is also not taxed, neither is the growth within the account
• Whatever you take out in a given year is added back to the contribution room of the following year (both the principal and the gain portion gets added back)

Unlike an RRSP, there isn't a $2,000 grace amount so be careful of over contribution! 

-TT

Considering RRSP vs TFSA? Check out my earlier article here: http://ttfinancialadv.blogspot.ca/2013/05/rrsp-or-tfsa-better-option.html

If It's Too Good To Be True...

It probably is! Here's a tragic story from British Columbia about a senior woman who lost $100,000 because of a fraudulent investment advisor:

http://www.cbc.ca/news/canada/british-columbia/story/2013/06/07/bc-bcsc-david-michaels-investment-advisor.html

To sum it up, she trusted somebody who was no longer certified to sell securities and took out a remortgage against her home. This personable fraudster made claims that the victims' initial investments were guaranteed, and that he would only invest into low risk funds. The reality is that he invested it into a lot of securities that were not listed. When the investments didn’t achieve the results he had hoped, the guaranteed claims were not followed through.

When trusting in someone to manage your investments, here are a few things to be mindful of:

• A small single office investment firm, but they claim that your investment is guaranteed. Do they have the financial backing to actually be able to do this?
• Is the firm registered with the Canadian Investor Protection Fund (CIPF)? If the investment firm is unable to pay you their guarantees due to insolvency, at least you are covered by the CIPF. If they claim they are certified, verify it in the member directory here: http://www.cipf.ca/Public/MemberDirectory/CurrentMembers.aspx
• Do some online research of the investment firm, are there many complaints on forums and many negative media attention?
• Is the person conducting the transactions and investment research actually certified and academically capable? (eg. CFA, CFP, etc...)
• Are there any unusual restrictions on when you can withdraw your money?
• Are you able to see the value of your portfolio "on the fly" or can you only get monthly printed reports?

Have fun investing and good luck!

-TT

Hybrid SUVs: Now Is It Worth It?

In the last article we looked at whether hybrid cars are worth the extra sticker price, and whether you really get the best of both worlds: cost saving while saving the environment. Today we will look at whether the same conclusion applies in the hybrid SUV category. Just for fun I have added the Porsche Cayenne S and Hybrid into the mix, not like you would care about fuel cost if you drove a Porsche but just for entertainment purposes why not!

Short answer is, NO, it's still not worth it after looking at the extra MSRP price and its fuel consumption.

As you will see from the chart below in the Net Loss (Saving) column, you are actually losing thousands of dollars by going with a hybrid SUV! This is in addition to the sluggish performance of most hybrids. Yes you can argue that an electric motor has more torque and initial power, but we also have to keep in mind the extra weight that the battery and hybrid components add to the vehicle, and what about passing on a highway? Sadly, initial or low-end torque won't matter if you're flying down on the 400-series highway trying to go from 100km/h to 120km/h to pass another vehicle.

Note: 8 years have been chosen as the comparison time frame because that's how long the warranty is on the battery.

Just for fun I have put in some numbers for the Porsche Cayenne S hybrid. It's only been recently introduced so not much information is available online, even Porsche's website doesn't have warranty info on this vehicle. Looking at the other warranty areas though, it seems to me like it would be combined into other warranty areas for now, so likely around 4 years of coverage is my estimate. Looking at the partial figures in the chart above, you can already assume you won't save enough to cover the extra costs. However, like I mentioned earlier I don't think you would worry about fuel costs if you are driving a Porsche Cayenne S!

So there you have it, it's not worth it. Originally I thought maybe the electric motor can save a lot of the engine's work (and thereby fuel) given how electric motors have much more instant torque than a gasoline engine, and we know that torque matters the most in a heavy vehicle like an SUV. Turns out you lose even MORE money buying a hybrid SUV due to the upfront price difference between hybrid and non-hybrid. Although relative to the sedans, SUV hybrids do save more fuel over 6 to 8 years.

I must say however, the new Porsche Cayenne S looks stunning!

-TT

My bad!

Folks, please be aware of the edits I made to the hybrid car cost analysis article. A slight mistake on my part has been made in the cost analysis (although the conclusion is still the same).

My sincere apologies,

-TT

Hybrids, Contrarily Not The Best Of Both Worlds

Almost every major car manufacturers these days are pursuing green alternatives. They have tried everything from electric cars to clean diesel engines, but one of them seems to be the most popular these days - the hybrids.

As many car companies have pitched so far, hybrids consume less fuel per KM and as a result not only do you save money, but there's a self-actualizing aspect to it of being "green". Side note: For the few special individuals out there, if you really want to be environmentally friendly then let's stop accelerating from behind only to cut me off in front of a red light, thank you! 

Contrary to popular beliefs, I don't think hybrids really save you much money. There are two major problems, one of them you can actually do something about, and the other one you cannot mitigate.

The first problem is the lack of power. Have you observed the exhaust pipes of these hybrid vehicles while walking around in the city? It is usually more apparent during the winter but in most cases you will notice that it emits a consistent trail of fumes. If the engine is working that hard under acceleration, you are not really realizing the full benefits of driving a hybrid, neither will you be achieving those advertised fuel consumption ratings. At best it can be considered fuel saving, but not near those jaw-dropping advertised fuel consumption numbers. In essence you are not saving that much more money due to this compensation for lack of power through harder accelerations. For a small group of you out there though, who do try to limit your acceleration to take advantage of the hybrid system, this point wouldn't apply to you.

The second problem is cost of ownership, will you be able to save enough fuel to cover the battery replacement cost? Don't forget as well, any maintenance work on the drive train will be more expensive since it's a more complex system. As it stands right now, both Honda and Toyota applies a 3-year warranty for their hybrid Civic's batteries. Depending on how much you drive and how you drive, you can expect to replace it around 6 to 8 years if you do a lot of low speed city driving. The deeper you drain the battery simultaneously while it's trying to charge, the faster it degrades so it is really dependent on your driving. Based on online research, a new Honda Civic Hybrid battery pack can range between $2,000 to $4,000, while a new Toyota Prius battery pack will cost closer to $4,000. Let's look at some numbers, keep in mind these figures are assuming you drive 100 percent green which most of you won't be. (So expect the actual fuel cost to be higher)

As you can see above, it is unlikely you will save in fuel cost as much as you will pay for a new battery pack after six years on a Honda Civic Hybrid. Assuming you do drive as green as you can and you manage to attain the most efficient consumption figures humanly possible, you are still faced with a hybrid car's premium price tag. Such a premium in price is typically around $3,000 to $5,000 over the regular compressed dinosaur powered version, this means you have to save an additional $3,000 minimum to make up for the extra vehicle price and making it even harder to attain breakeven! 

EDIT: Please note that the previous version of this article is slightly incorrect, I mistakenly thought that Prius had a 3-year warranty when it's actually 8 years. The total savings in fuel over 8 years for a Prius is $4,177.92, just over the cost of replacing its battery assuming you drive 12,000 km (7,456 miles) per year. But in the end you are still faced with the premium price tag, something the fuel savings won't be enough to cover.

EDIT2: Let's say by some miracle your Prius' battery happens to breakdown just before the 8-year warranty ends and they replace it for free, you get another 6 to 8 years of usage. Your total fuel savings will now be approximately $8,355 over 16 years. It's still not worth it because the price tag for a Prius is $26,100, a better performing pure gasoline version Honda Civic cost $16,000 MSRP. The regular version of the Civic, being it's a more simplified power train will cost less to maintain, and it would handle better without the excess battery weight. Most importantly, a Prius would cost $10,000 more when you would only save $8,355! Of course, you're free to substitute the Honda Civic with another car in its class but unfortunately the end result will be the same.

It seems a hybrid car is worth it only if you drive in upwards of 20,000 km (12,427 miles) per year, while doing a healthy mixture of both highway and city driving to prolong the battery life. So if you are looking to buy a new vehicle, better whip out that calculator and do some number crunching! In the next article, we will investigate the fuel savings of a hybrid SUV because we can't use an analysis of hybrid cars since fuel consumption of the two are different.

-TT

Mutual Fund 3: Fees, The Necessary Evil

Unfortunately, there is no free lunch and transactions cost money. In this article we will explore the different types of fees, and what they mean.

Front-end load

A fee that is charged upon purchase of the mutual fund. This is basically the equivalent to the commission fee charged when you buy shares of a company.

Back-end load

A fee that is charged when you dispose of the mutual fund. This is basically the equivalent to the commission fee charged when you sell shares of a company. In most cases you will have either front-end or back-end load.

Management fees (expressed as MER – Management Expense Ratio)

Management Expense Ratio expresses management and operating fees as a ratio of the fund's average net assets. (Net assets is the fund's total assets minus its total liabilities) Lower this ratio is the better but obviously you will never find 0% MER, a fund's MER can be found in its prospectus. A prospectus is a little booklet or brochure that they give you which describes the fund, what they invest in, what their current holdings are, their goals, fee structure, and etc. Unlike the above two types of fees, this is ongoing and not a one-time fee. Typically this fee is around 2 percent.

Penalty fees

As previously mentioned in my other articles, beware of limitations on when you can sell your units in the mutual fund. Many mutual funds from financial institutions will penalize you for selling within 30 days of your most recent purchase, sometimes even 90 days or longer. Their objective is to minimize the transaction and administration fees, this will in return lower the MER.

"Hey, I better not be paying tax on these fees! Do I have to report these and deduct them against any gains and distributions?"

Don't worry, the financial institution will send you a T3 or T5 slip and they would have already deducted all these expenses for you in calculating your income and gain. You will not be taxed on the gross amount.

Note: Typically you will get a T5 for investment income derived from a mutual fund, but if you own units  of a mutual fund trust, then it's a T3 because a T5 is for investments into mutual fund corporations.

As per CRA: "If you own units of a mutual fund trust, the trust will give you a T3 slip, Statement of Trust Income Allocations and Designations. If you own shares of a mutual fund corporation, the corporation will give you a T5 slip, Statement of Investment Income. This income can be capital gains, capital gains dividends, dividends, foreign income, interest, other income, return of capital, or a combination of these amounts." [RC4169(E) Rev. 12]

As always, happy investing! Hope you all took advantage of the recent buy-in opportunity when the market dipped a bit, this goes for stocks and mutual funds.

-TT

Exciting Ride This Week

Special announcement to those who invest:

This week will have lots of economic news so be ready to act. 

Canada

• Employment/payroll numbers of March to be released on Wednesday
• Mark Carney's announcement on interest rates and comments on fiscal policy this Wednesday
• Industrial product and raw material indexes of April to be released on Thursday
• First quarter GDP to be released on Friday

U.S.

• April Employment and unemployment data to be released on Wednesday by the Department of Labor

Be on the lookout for any news article reporting on these data, as they will say whether it is in-line with analyst expectations or not. Mark Carney is highly unlikely to raise the rates now or commit to a raise for the near future, though we will see how things are when Stephen Poloz steps in as his successor. (He might rocked the boat with a different view on rates. He takes over starting June 2013)

There you go folks, you have been informed, don't get caught by surprise ;)

-TT

Mutual Funds: The Dating Process

Much akin to the dating process, selecting a mutual fund requires there to be a good match! Thankfully, you will never encounter the "psycho-type" in mutual funds, nor will there be an overly attached fund. However, selecting the wrong fund could be disastrous especially if there is that 30 days selling restriction I was referring to in the last mutual fund article. Below are the various types of mutual funds:

Balanced Growth

This type usually means you get a bit of growth and a bit of capital preservation. You will get close to 50% of it being invested in stocks, the rest are in bonds and other safe alternatives such as Asset-Backed Commercial Papers (ABCP) or something similar to GICs.

Growth

This type of fund will invest a majority of your money into shares of growing companies, a couple years ago that would be companies such as Apple and Google. You will likely not get monthly distributions if you invest in a growth oriented mutual fund because those companies will not be paying dividends, they would retain the cash for growth instead. If you want monthly cash outs, you're knocking on the wrong door my friend.

Monthly Income

This is the fund you want if you want monthly distributions. A majority of the fund will be invested into companies that pay dividends, this usually means blue-chip companies. This mutual fund is relatively safe, I would say safer than the above two types of mutual funds. It is definitely suitable for those who are in retirement, but don't invest every dollar of your retirement money in this of course because it's not a guarantee that it won't drop in value. On the flip side, there is a possibility that the mutual fund can increase in value and thus yielding a gain in addition to the monthly distributions!

Foreign Holdings

Usually this type of fund will have the country's name in the fund's name, eg. "US Blue Chip Equity" or "European Growth". How risky it is would be dependent on the country's economy and the type of investments it holds. Watch out for currency differences though, your financial institution may charge an extra service fee for currency conversions. It is possible that the fund is sold in $CDN though, I have encountered that and in such cases you won't be charged a conversion fee by your bank (or whichever financial institution of your choosing), basically the fund covers it by accepting $CDN and converting it themselves later. What types of investment this fund will hold depends on its objective and you should be able to tell from the name of the fund.

 

Categorical or Sector Funds

They will invest into a specific sector or sectors, eg. "Health and Sciences". These funds are still diversified in a sense because you will be buying shares of multiple companies in that sector, but at the same time less diversified because you are still confined within a particular industry. However, with the higher risk involved you do get a higher return usually. I'm fairly sure mine went up about 15% since the beginning of this year, it's the Health and Sciences sector fund.

Anyways, as you can see folks there are a lot of different types and depending on what your goal is and what you can stomach without losing sleep, there is one just right for you. On the next article, I will be covering the fees involved in a mutual fund. Stay tuned!

-TT

Market Update, Clearing The Clouds

Taking a short moment on my lunch break at work here to give you this update:

As you may have discovered, these past two days the market has been quite erratic. My position is that in the coming 12 months the market will generally go up (US & CDN market), but tread carefully if you're looking for short to medium-term gains.

These are what's happening right now, it's sort of a mixed bag at the moment:

• Japan's market recently dropped ~7% due to weak Chinese data and Bernanke's speech about potentially cutting back their bond buyback program in the States. 
• Long weekend for the U.S. in the coming days, investors don't like not being able to trade on Monday because there's more of a chance of something going wrong in three days compared to just two days, to mitigate this uncertainty and risk they are more motivated to sell off their investments today and reap in their current profits (whatever they have gained since they bought it a few weeks ago or whenever)
• U.S. April durable goods orders higher than expected, 3.3% vs. 1.5% (Reuters), signalling that the economy isn't all that bad, and in fact somewhat improving
• Unexpected decline in China's manufacturing data, as we know China's manufacturers directly affects the demand for raw materials, companies such as metal producers selling internationally will be negatively impacted. Not to mention, since a lot of other economies have production in China, lower Chinese manufacturing data could also signal a lower demand for consumer goods overseas (such as Canada or the U.S.). This is why China's weak data caused a worldwide sell-off, and its negative effect was further compounded by Bernanke's speech
• Bernanke's speech on Wednesday, as I have mentioned in my previous post, his uncertainty and lack of firm commitment to reassure investors about the continuation of the U.S. stimulus programs and bonds buyback program has led investors flocking out of fears that they will taper down their stimulus measures over the summer and potentially the rest of the year. Investor fears that this will stall growth

Good luck! All the best,

-TT

Today's Downturn...

For those who owns investments, common shares/stocks, or mutual funds, you're probably quite disappointed at the market right now. Though on the positive side, these two days will be a perfect opportunity to buy in because usually in situations like this the market over-sells and the prices will recover a little shortly.

The gist of it is this: everyone wanted Bernanke to give a firm commitment to continue their bond buyback and fiscal stimulus...well that didn't happen this morning. Instead we got the usual "we will keep it the way it is now until the market gets better, which if it does we will start tapering the stimulus gradually over the summer and beyond" (I'm paraphrasing here, not his exact words). Basically he didn't say anything, it's like if a mutual fund prospectus tells you "we strive for growth while preserving capital", or I tell you myself "the sky is blue!". Of course any mutual fund is going to be striving for growth while trying not to lose your money, is there one that doesn't try for growth or tries to lose your money? What investors were trying to gauge from Bernanke's speech this morning was whether the Feds think the US market will be weak in the coming months, if he states a firm commitment (either to continue or to reduce stimulus) for the summer, then investors can take that as a direction or have some sort of basis to predict what will happen for the near future. When people don't get the reassurance they need, they assume the worst and they sell, evident earlier today.

Anyways, I still believe that the US market will grow in the long-term over the next 12 months. For those who intend on holding an investment for a long time, then this is a good opportunity to buy.

Hope it works out for us all in the end!

-TT

Mutual Funds: The Good, The Bad, & The Ugly

Remember that earlier article about diversification in your investments? Mutual funds are a great tool to achieve diversification without investing a great deal of money. There are many types of them out there but the main benefit remains the same – that is to pool money together so that instead of investing into one company, you can afford to own shares of a number of companies. If an average investor were to invest on their own without pooling cash, she can probably only afford to invest in a handful of companies because if she had spread it out too thin, it's no longer worth it given the commission on each transaction. Another reason it is not feasible is because the shares are usually sold in board-lots (a term used to describe a chunk of 100 shares of any company), buying a smaller portion may incur extra fees. By pooling cash using a mutual fund, investors can have a stake in many more companies without incurring the extra charges and commission fees themselves. What's the down side? Well... with the huge amount of diversification and less volatility, you will usually not earn as much as investing into a few stocks on your own.

Now I know many of you don't have the time to read through my paragraphs, and I don't intend on putting you to sleep so here's the Spark Notes version:

Why might you want a mutual fund?

• Achieve diversification without investing a large amount of money
• You want to save a portion of each paycheque (aka. paycheck), and a mutual fund allows for smaller investments
• You don't have time to manage your investments
• You want a professional to pick specific investments for you (eg. Pick stocks within a mutual fund)

  

Why might you not want a mutual fund?

• You want to take on more risk in exchange for a higher return
• You like to be in control of which companies you invest in, maybe the thought of investing into a company named after a fruit makes you feel uneasy, or [insert reason here]
• You don't like the restrictions placed on when you can sell it (some funds will charge you a fee if you sold any portion of it within 30 days of the most recent purchase)
• Diversification in a mutual fund is too much for you, you want to keep it to a smaller portfolio

Now that you have seen the good and the bad, what's the ugly? Here it is – the fees! Within a mutual fund there are a lot of transactions made by the investment manager and all those cost the fund money, which then gets transferred to you as the investor. In addition you also have to compensate the fund manager, which you would not have had to if you invested in companies on your own. To make it even costlier, some funds will charge you a fee upfront or at the end when you sell it (called front-end and back-end load respectively). We will get to fees in another article later but for now just know that although you don't pay the fees directly, there are lots of costs in the background that sometimes can be more than the commissions you would incur from trading shares on your own!

In the next article we will explore different types of mutual funds out there, and help you decide which one is right for you

Happy investing!

-TT