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

Starting A Business

Do you have a great idea that will knock everyone's socks off? You're not alone, according to Statistics Canada there are on average 99,000 new businesses created each year between the years 2002 to 2008. However, the amount of closures was almost just as high with approximately 90,000 small businesses closing up shop per year between 2002 and 2008. If you fail to plan, you are planning to fail. Note: Sorry to disappoint but we won't be talking about Dragon's Den today - shucks!

Realizing when you need help

You may got that entrepreneurial creativity that you believe nobody can match, the unfortunate truth is nobody is good at everything. We have an economy that fosters specialization! If you're amazing at generating new product ideas that's great, but if you're not good at keeping track of your finances and developing a financing plan or a budget then please get someone who does. Often times if you require external financing, the bank, venture capitalist, or even those generous folks on Kickstarter are going to want to see your budget. In most cases your funding will come in stages, you will only receive the next bucket of cash if the stated milestones are met. That's another reason why there needs to be a detailed plan and budget from the start (sorry... pinky swears won't do here), even if you didn't initially plan for external financing because you never know what will happen later.

Government support

Need to buy equipment and you need a loan? You can obtain a loan under the Canada Small Business Financing Program (CSBFP) with a financial institution if you qualify. It may be easier to obtain than a personal loan because the government will partially or fully guarantee the loan. The main criteria are that it must be a small business or a start-up operating for profit in Canada, with gross annual revenues of $5 million or less. Note that you can only use it for capital equipments, aka. items that provide long-term benefits, it cannot be used to finance working capital items, eg. inventory, supplies, etc.

If you're starting a company that does R&D, the above mentioned CSBFP cannot be used to finance R&D work. Look into programs such as the Industrial Research Assistance Program (IRAP) by the Canadian government. Alternatively, the government also provides incentives through tax credits for Scientific Research & Experimental Development (SR&ED) work. Whether you have incorporated or not, you may qualify if you are doing research or development work that gained new technical knowledge in a scientific area.

See links below for more info on government support.

Embrace the electronic age with electronic tracking

Gone are the days with paper journals, now there are plenty of software and computer hardware out there that can help you manage your business's finances. QuickBooks is a popular software package out there that can keep track of your transactions, the other one is Simply Accounting but I think QuickBooks is the more popular choice at the moment. These software packages will give you the ability to slice and dice data, and find out in a couple of clicks exactly how many customers owe you money and exactly how much they owe. It will also give you the ability to calculate important financial ratios, so you can identify rooms for improvement.

To conclude folks, moral of the story is: keep good financial records if you're starting a business, and draft up a budget/financial plan. It may be necessary when you seek external financing one day, but even if you do not it's still a good idea to anticipate future cash flows. To assist you in your venture – financially or otherwise, there are many resources available to you, government assistance programs, electronic tracking programs, check out the links below for more info!

http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.html

http://www.nrc-cnrc.gc.ca/eng/irap/index.html

http://www.bdc.ca/EN/advice_centre/start_or_buy_a_business/Pages/RelatedArticles.aspx?PATH=/EN/advice_centre/articles/Pages/start6d.aspx

-TT

Travel Deals Trick, May Or May Not Work But Why Not Try It Out!

As vacation season is fast approaching, some of you may be using travel deals brokers such as Travelocity. Here's a neat trick that I suggest you should all try next time you run your quotes.

This other day I was catching up on some Reddit comedy, okay...maybe not "this other day" since it was a few months ago and I just remembered it now but it's probably still happening. Apparently third party online travel agencies keep track of your visits and quotes, and then use it to bump up the prices you see on the screen. The more you look up a particular trip or flight schedule on their website, the more their prices will increase to mimic a shortage of seat situation (or to simply motivate you to purchase before the prices go up again). To be honest I have never tested out this theory but thinking back, I did notice that when I looked up my New York trip last year, the more I checked the prices for that scheduled week, the higher my quotes became over the period of a month. This could be due to an actual shortage of seats, but test it out anyways if you are shopping for a vacation! All you have to do is look up the same trip using a different web browser or by using incognito mode in Google Chrome. If the prices are indeed lower in the other web browser, you will have proven that it's true!

It will not cost you anything to test out this theory, so if you're shopping for a trip then test it out... maybe it can save you some money

-TT

Caution! We all knew this was going to happen someday

Fake polymer notes are now entering the market. Short article from the National Post can be found here, where they show what you can look for on a genuine note:

http://news.nationalpost.com/2013/05/16/rcmp-worries-canadians-are-overconfident-in-new-bank-notes-as-police-find-multiple-counterfeit-100-polymer-bills/

Hopefully none of you have been lucky enough to receive one of these yet!

-TT

Stock Investment Tip 4

Ways To Get Into The Market

Today's market was red hot! For those who haven't gotten into trading shares yet, there will probably be a small dip later this week or early next week after today's rally, so do take advantage of that buying opportunity.

There are a variety of ways you can get involved into the stock market. A great starting point would be to open up a trading account with your bank. I suggest starting with your bank's discount brokerage before going to third parties or standalone discount brokers (such as Questrade). Once you have built some confidence and know generally what you're doing, it would be a good idea to seek standalone discount brokers because their commissions are often cheaper (in exchange for less hand-holding).

Basically, you can do three types of transactions with stocks: 1) buy shares, 2) short sell shares, and 3) options. Actually... "basically" is a little misleading once you get to the third one but I will try to make it as easy as possible.

Buying shares:

You do exactly just that, you purchase shares on the open market such as the TSX or NYSE through your broker using their online interface. Once the price has either gained enough grounds or dropped below your loss tolerance/threshold, you would then sell it on the open market through your broker. Obviously your goal would be to sell it for more than what you bought it for, less commissions.

Short selling shares (Make more $ as it drops!):

What happens here is that the broker will lend you shares to sell immediately on the open market at current price, and then when you want to close out your position you simply buy the same amount of shares on the open market to cover what they have lent you. The idea is to buy later at a lower price than what you have sold the borrowed shares at. This type of trade is very risky because there is no ceiling theoretically as to how high the stock can rise to, therefore your potential loss is unlimited. 

Options on shares:

In this case you are buying or selling an option on a company's stock. To complicate matters there are two types of options that can be bought and sold, they are 1) Call options and 2) Put options.

Buying a Call option means you are buying the right to purchase shares for a specified price within a specified period of time. That specified price is named the exercise price, and it is what you can buy shares at no matter what the market price turns out to be later.

Selling a Call option, also called writing a Call option, means you are selling an option to someone so that he or she can buy shares in the future for a specified price within a specified period of time. It is the flip side to the above "buying a Call option". Note that your losses CAN be unlimited if you don't currently own the shares, because if the buyer of your option exercises their right you will have to give them the shares in return for the exercise price. Since share prices can rise to no end and you will be buying shares on the open market, that opens you up to unlimited losses. The technical terms if you're doing some Googling, are Naked Call for ones where you don't currently hold shares, and Covered Call for ones where you already own the shares. By selling a Call option, you have the obligation to sell shares.

Buying a Put option means you are buying the right to sell a company's shares, to the seller of the Put option, for a specified price within a specified period of time. So if the stock price dips, you can still sell it for whatever the exercise price is because you paid the seller of the option in order to have this right.

Selling a Put option means you are on the other side of the above transaction. So you get paid upfront a premium for the option, but you have the obligation to buy the shares from the purchaser of the option if he or she decides to exercise it in the future. Your losses are capped because the most you will lose when they exercise the option is simply (Exercise Price - Premium Received per share) x # of shares. BTW, yes I did leave out opportunity cost since you could've gained by being on the other side of the transaction, but let's not go there... these articles are meant to be easier to understand for most folks!

I know the third one is a bit complicated and actually I would advise against using options until you have become familiar with trading shares, it's easy to lose money with options! The good news is though, if you bought an option and didn't use it by the time it expires, that loss is a capital loss for Canadian tax purposes.

Happy investing everyone!

-TT

But...but...it's 50% OFF!

Saving up isn't easy sometimes, especially when that big red sales tag is saying "50% OFF!". Here are some ways to help control your spending habits if it's becoming out of control:

Set milestones on your bank account balance:

Develop a plan with saving goals, tell yourself that you can't spend money on any big ticket items until you reach $xxxxx. Remember the reward system I was explaining not so long ago in my other article? It can be used for this too! Once you reach certain milestones, reward yourself with a fancy dinner or whatever else you deem appropriate. Obviously, don't splurge and spend more than what you have saved up.

Envelope method:

Set up envelopes of cash at home for specific purposes, this way you can never spend more than what you have allotted to certain items (and every time you are short you will know right away).

The drastic method, for the shopaholics out there:

Lowering your credit limit on your credit cards is an easy way. To go one step further, force yourself to save by doing the following. Every time you get your paycheque (i.e. paycheck for my American readers), invest a chunk of it immediately so you have barely anything left to spend on non-essentials. Often times with mutual funds, you can invest smaller amounts making it affordable for bi-weekly paycheques. By putting it into a mutual fund regularly, not only are you investing and making money out of it, you are also forcing yourself to save up because there are often restrictions on immediate withdrawals out of a mutual fund. In the case of TD, you cannot withdraw within 30 days after a contribution or you will face a penalty fee (for most of their mutual funds). If mutual funds aren't "rad" enough for you, then put it into a high interest savings account or GIC. Preferably not a GIC because you get really small returns with it right now but for the purpose of locking in your money so it forces you to save, it may be a good idea.

Next time you make a big ticket purchase, just ask: "do I really need this right now?". In most cases, if you hesitated to answer it means you don't need it immediately. If you wait and purchase it later, it will probably be cheaper and don't find excuses! I find the worst are those "buy one get one half price" deals, because it sucks you into buying more than what you need and most people will justify it by saying it's a great deal. Sure it's a great deal but you don't need it. I opted in to pay a little extra for a bigger can of WD40 because it was a big bonus to the regular bottle, guess what? I still have 80% of the can left and it's been 6 years. The can is probably going to rust and leak soon, and this is what happens... a waste of money because of greed.

Have a wonderful day folks, and a big shout-out to any of you who are mothers or "soon-to-be-moms", Happy Mother's Day!

-TT

Stock Investment Tip 3: Which Is A Good Buy?

Which Is A Good Buy?

While there are no guarantees that a company's stock will be a good buy, there are good indicators to look for though. Here are just some of the common ones:

Good track record: This company almost always had positive news releases, for a mining company, you'd be looking for repeated discoveries (preferably a record of always discovering more than expectations)

Earnings (EPS): This company consistently beat analysts' expectations of EPS, whether it's quarterly figures or annually that you're after, your online broker's research tool should show this unless you are using a heavily discounted broker.

Good innovations: This company has an upcoming product that will rock the market and it isn't a fad. The product or service is one that will likely survive the long haul and rake in lots of profits for the company.

Improvements: A history of improving operating efficiencies, see management commentary (in the MD&A of an annual report) which explains their results for the period. This section generally will say if they had improved their efficiencies.

Dividends: Management will generally increase dividends only if they foresee an increase to profit level for an extended period of time into the future. The reason is that any decrease in ordinary dividends signals poor profitability and confidence in future operations, therefore management generally avoids decreasing it at all cost because it will drive share price downwards (even if it means they have to borrow money to pay dividends). In other words, management does not take the decision to increase dividends lightly. If they increase it, it's because they think they can sustain it for a long period of time. This signals future company growth and it's definitely what you want to see in any company you invest in (unless you're "shorting" a stock, aka. "short selling" see next tip for more info).

I am sure there are more indicators to look for, but for now that's all I can think of. Stay tuned for the next stock tip! Maybe I will give more indicators in the future, maybe I can even have my CFA buddy chime in actually...just a thought for now ;)

-TT

Stock Investment Tip 2: There's More to Diversifying

Diversification: A Little More Than Don't Rest Your Eggs In One Basket

This is something you hear a lot: "don't put all your eggs in one basket". But how many different baskets do you put it in? Which baskets should you put it in? What allocation should be in each basket? No one ever delves into these it seems, until now... thou shalt be informed!

Let's start with the basics, the idea of diversification is to spread your invested capital (aka. money) across a number of investments so that when one goes down in value, you have another one that may be going up in value thereby offsetting the decline in the first investment. This way instead of having volatile swings that are based on one investment's price movements, you end up with a less volatile portfolio of investments because of the offsetting effect mentioned above. Generally all stocks will go up in value over time, there's a higher probability that it will go up rather than declining. Therefore you don't have to worry about always having opposite price movements offsetting the gains.

Can I put my money in any other investment?

Short answer is yes, but to maximize its benefit you should place your money across investments that are NOT perfectly correlated. In layman's terms, don't put it into another stock that has price movements moving in tandem or exactly the opposite to the first investment. If you do, one of two things will happen: 1) no offsetting effect because they both move in the same direction and magnitude, 2) the changes are exactly offsetting, leaving you with zero gain or loss. In essence, don't invest into another company in the same industry (because of #1 mentioned above), don't invest into their suppliers if the first company is their major customer (because when the company fails, there goes the price of their suppliers' stock, #1 above), don't invest into any other company that has exhibited the same price movements in the past (eg. during a specific week, A increased 5%, B also went up 5%), and don't invest into another company that moves exactly opposite to the first company (eg. A increased 5%, B went down 5% within the same week). If the two company's stock price moves in a somewhat similar fashion but not always moving in the same direction and amount, then you should still be okay to invest into that company. The problem is only when they move in the same or opposite directions in the same magnitude (amount). For those who are really financially savvy, calculate the coefficient of correlation between the two stocks.

How many different investments should I hold?

No more than 10 to 15 companies if you're doing purely stocks. Don't remember which textbook I read this from but there was a chart showing that the marginal benefit of diversification gets smaller as you increase the number of companies. Also, it may eventually become too much to keep track of. It is definitely a good idea to mix in some balanced growth mutual funds and bonds into your portfolio though.

Allocation to reach your goal

Many different goals you may have, for those who want to preserve their capital while growing moderately, try this mix:

50% Balanced growth mutual fund, they should have monthly distributions

40% Stocks comprised of companies in the $10 to $29 per share range

10% Bonds or bonds mutual funds

Just remember folks, whatever you choose to invest in, always reserve an amount as a safety net. You don't want to be caught with your pants down when an opportunity strikes and you don't have the cash, or if you simply need cash and you're cash-strapped.

Next tip to be uploaded on the weekend, stay tuned!

-TT

Stock Investment Tip 1

Mindset: A pitfall that beginner investors always make

Don't expect to get rich quick, unless you have some sort of insider tip but if you had, you may not want to use it because then you run the risk of getting investigated by the SEC or OSC (securities exchange commissions of the US and Canada respectively). *cough cough Martha Stewart* It would certainly raise red flags if one day you invest $10,000 and two days after it's worth $20,000.

Another mindset to avoid is freaking out over minor price declines, if your stock dropped 5% in one day and it's not because of any negative news disseminated officially from the company itself, then relax because it is probably going back up within the next few days. On the other hand if the market in general is having a major crisis or about to enter into a recession, you may want to sell at that point. What I am trying to say is that there are going to be ups and downs, don't sell it because of a temporary drop because what will likely happen is you'll end up selling when it's low and getting back on the bandwagon when it's up (thereby realizing the loss, selling low and buying high). Oh and a side note, if you sold shares of a company, realized a capital loss and then subsequently bought it back within 30 days, that capital loss is not realizable for tax purposes and is postponed until you get rid of the shares for good (i.e. neither yourself or anyone related to you by blood or marriage, buys the same shares within 30 days after you sold it).

Depending on which type of companies you have invested in, here are some signs to indicate you should sell:

• Profits dropped significantly this quarter or fiscal year, and the decline looks to be a prolonged one such as dying market for the company's product & services
• Patent or intellectual property rights issues that can lead to a cease in production or their ability to sell their products
• Company management were implicated in a fraud case
• Consistently failed to meet analyst expectations on EPS and other earnings figures (these information can be found in your online broker's market research tools or on prominent sites like Zacks.com and Financial Post)
• More than one downgrade consecutively of analyst expected share price
• If there are lots more demand for Put options than Call options, again your online broker may or may not show this information but if it does, this shows that investor confidence is low

Next tip to be uploaded tomorrow, stay tuned!

-TT

An Idea Your Insurance Provider Doesn't Want You To Know

As many of you are aware, car insurance is mandatory for all drivers in Canada. The idea behind it is to spread the cost of a few incidents across the general population of drivers, this way it's more affordable for all of us. Today I'm going to introduce to you a philosophy that some of you may find mindboggling, but in deeper thought actually makes sense!

Raise your deductible to $1,500 if not $2,000, and increase the liability coverage to more than a $ million.

At first glance you may be tempted to question my sanity, but let me explain. When the damage is less than $2,000, you're not going to claim insurance anyways because A) your insurance premium will go up in the future for the next 7 years because that's how long your record is kept, and B) you have to pay deductible anyways, even if it's currently at $500 it is just not worth it considering the higher premiums you are already paying for having a lower deductible. The purpose of car insurance or any insurance is to cover costs that you cannot possibly afford. Example, you were careless and ran over Timmy as he ran across the road to pick up his basketball. Now you're on the hook for millions of dollars because he was a star player in the NCAA and was about to sign a multimillion dollar contract. Actually, a more realistic example: you're now on the hook for millions of dollars because you ran over a lawyer while you were driving in Downtown Toronto. The harsh reality is, depending on how the court calculates the worth of the victim's life it could be well over $1,000,000. Not to mention that is only one life that's calculated, what if you hit a car and there was a passenger? The standard policy is usually a million, but that's not enough and guess what's going to happen when it isn't enough? You will personally have to cover it, opening yourself to possible bankruptcy. Not sure how the court will calculate it, but I have heard that a reasonable method would be to calculate the present value of the victim's foreseeable earnings for his lifetime in the event of life threatening disability or significant brain damage (or death and compensation paid to their estate). Depending on how much that person earns, it could be well over a million dollars. Although the court will consider possible investment income that can decrease your liability because of their consideration that a prudent person will invest their money after receiving the lump sum, it probably won't make a huge difference relative to the total before.

To sum it up, why bother paying a higher premium for a lower deductible if you aren't going to claim insurance anyways for minor damages? Even if you aren't convinced that it could cost you more than $1,000,000 still, why pay the higher premium? You're basically wasting money, allow yourself a bigger liability coverage by increasing your deductible and let the insurance work in your favour. Of course, insurance providers wouldn't want you to know this, if anything they want you to lower your deductibles so you can pay them a higher premium without making any claims!

Anyways, have a wonderful evening folks. Drive safe and don't hit anyone. Unlike certain video games involving grand theft auto, money does not float above a dead body after you hit them....neither can you get away by repainting your car.

-TT

Is Your Money Disappearing? How About A Reward System?

It's Tuesday, your hands are sweating, you start pacing back and forth because you're already a few days late on your bills... just 3 more days until your next paycheque but then what? Only to be short on cash again in a week's time?

Hopefully the above scenario doesn't sound like you, but unfortunately throughout the past few years I have came across a few who actually lives paycheque to paycheque (for my American readers, it's "paycheck"). In almost three-quarters of those cases, it's not because they don't make adequate amounts of money but rather it's due to lack of control. It is crucial to keep track of your spending. A lot of us already do which is great, but there are a few out there that do not. If you happen to know of such individuals, please send them this article!

The easiest way to do so, is to keep all your receipts. Whether you paid with cash or paid with credit card, by keeping all your receipts and recording them in an Excel spreadsheet you can tell where everything is going, and how dire the situation may be. Accounting isn't just for businesses! By analyzing these numbers you can then see where you should cut back.

If you are using Excel, I recommend setting up a column where you classify expenses by codes. This way you can do some financial analysis on it and show trends or charts once you have enough data. For example, if you draw up a pie graph and over 60% of your monthly spending was on food, you may want to consider going out less for lunch. Industry experts have recommended that you should try to save at least 10% of your take-home pay and I agree with them. If 60% is spent on food and 10% is saved up, that only leaves 30% for other things! It's not too difficult, here are some options and ideas:

• Buy lunch only 3 times a week during the work week, interlace it with meals brought from home in between the 3 days
• Go for cheaper alternatives when buying lunch
• Bring lunch from home all 5 days of the work week, or
• Use the reward system, bring lunch from home all 5 days of the week but allow yourself to buy inexpensive snacks everyday, or perhaps a small daily latte from Starbucks?

Actually the reward system can be applied to other spendings, the key is to reward yourself for saving money. If you're still not convinced that it will work for you, here's the technical reason. The key is to replace items that give you satisfaction with inexpensive items that also gives you equal amounts of satisfaction if not more (in economics we call it Utility, which is simply a unit that measures satisfaction). Let's say doing one thing gives you a satisfaction of 5, as long as the reward plus the inexpensive alternative adds up to at least a utility level of 5, you should be just as satisfied if not happier.

If your "financial crisis" is due to inability to curb your spending, then refer back to my older post where I found a Yahoo! video that offers great tips on how to correct your spending and "fiscal policies". (See below for link) Sadly, I don't think you will be receiving any "Quantitative Easing" unless you're still young and your parents are happy to support you, so start planning my friends.

http://ttfinancialadv.blogspot.ca/2013/05/why-groupon-may-not-be-helping.html

-TT

RRSP or TFSA, The Better Option

I know it's past tax season now but you could always use this knowledge for future years so I figured why not! Every tax season, there seems to be a lot of talk about RRSPs and TFSAs. They are both great investment vehicles to save up for your future but which is better?

To refresh your memory, here are a few key points we know for each:

RRSP

Contribution room is 18% of your earned income (up to a limit that changes each year), for most of us our "earned income" is simply our employment income (no... unfortunately your investment incomes don't count!). We also know that whatever you contribute during the tax year, you can deduct that amount off the year's income and your money grows tax free within the RRSP. When you decide to take it out before retirement, you're subjected to withholding taxes AND the amount withdrawn increases your income in the year of withdrawal. The good news is, those taxes withheld can offset some of your increase in taxes owing. One of the main advantages or main point of using an RRSP is to save now at a higher tax rate by contributing and deducting from income, than what you would be taxed in subsequent withdrawals during retirement (taking it all out before the end of the year you turn 71 yrs old, or through periodic payments after converting your RRSP into a LRIF or annuity, whatever choice it may be). Note: You must convert your RRSP to a retirement income vehicle or take it all out by the end of the year you turn 71 yrs old.

TFSA

Each year you get another $5,500 of contribution room, this number is indexed to inflation and will change in $500 increments only (that's why it was $5,000 in the past few years). Note that whatever you take out, can be put back in the following year. In a sense that contribution room is never really "used up", it can be recycled unlike RRSPs, where once you use the available contribution room, it's gone and does not get added back if you withdraw any amount from your RRSP. TFSA also allows tax-free growth within the account but the initial contribution is not tax deductible. However, any amount you withdraw does not get included into income, nor is it subject to withholding taxes.

So after all that technical garble, what's the conclusion? Let's do a simple example, let's say we are contributing $10k now, letting it invest over 30 years @ 10% annual return, then withdrawing it in such a way that allows around $25k after taxes for your annual retirement spending. 

If your tax rate now and after retirement are both in the lowest income bracket, (which means you'll withdraw cash after retirement annually in such a small amount that you'll be in the lowest bracket) then the total net amount of cash after tax is the same in the end. BUT TFSA is still more beneficial because A) you can take it out all at once without negative tax implications if you choose to, because withdrawals are not taxed. B) TFSA room is recoverable upon withdrawal, RRSP contribution room is based on earned income and therefore not recoverable. As mentioned earlier, whatever you remove from an RRSP does not get added back to your next year's available contribution room.

If tax rate now is not in the lowest bracket but it will be during retirement, you will end up with a higher total net amount in the end by using an RRSP. However, you have to consider your flexibility/liquidity needs. Will you need the option to take out the entire amount after retirement? The trade off is a smaller amount in total when using a TFSA but you get this flexibility. What if your grown children needs help with their down payment for a home? Taking a large sum out of an RRSP may not be possible because you may've transferred it to a LRIF or some sort of annuity. Let's say you did not convert your RRSP into a LRIF or annuity yet and you could take a large sum out, then you're still faced with withholding taxes and a steep tax rate because you're likely going to be in the highest income tax bracket for taking out a large sum. In essence, using a TFSA to get a slightly smaller total value at retirement might be worth it. This would be a matter of personal preference of course. Maybe you want your kids to learn the value of the dollar and refuse to help them with any big purchases! Then you likely won't be seeing any big withdrawals during retirement, assuming you got a great coverage from your health insurance.

So when is an RRSP a better option?

     1)      You're not in the lowest tax bracket now.

     2)      You don't see yourself withdrawing large sums during retirement years.

     3)      You want to take advantage of income-splitting through spousal RRSPs.

     4)      Or if you have used up all of your TFSA contribution room and you have no choice.

For more information or advice specific to your situation, consult a seasoned Financial Advisor at your local bank. Try to get one with a CFA designation or someone with some experiences under their belt. I just had one at my local branch telling me the 2013 TFSA limit is $5,000! (False! It's $5,500)

All the best folks, "May the 4th" be with you!

-TT

Comments section disabled

A couple folks have asked me why the comments feature has been disabled in all posts. The reason is that as much as I want to get to reply each and every single one of you, there's only one of me and a lot more of "you". If I were to enable comments I won't be able to go through all of them daily and it would not be effective anyways as a result. Most importantly I don't want to get into a situation where I am asked to advise on specific situations because that opens up to potential legal implications, in addition to the fact that since I don't know all the specifics in your situation I don't want to start tossing specific advices.

If I can get some volunteer moderators and writers, I will consider opening it up in the future. My apologies if this has caused any inconvenience!

Have a wonderful weekend everyone,

-TT

News Column...

Folks, don't forget to look at the news section on the right hand side of my page. Those tags can be clicked to show different types/areas of news that you may find useful. Don't worry they are just Google search results, not viruses. 

- TT

Stocks: Spotting Those Monkey Business

For those of us who hold shares or mutual funds, you must be laughing right now after today's rally due to positive US employment data. Stock is a great way to make large returns but it comes with great risk. You see, companies like to equivocate a lot and be vague in their reports and claims (typically biased to their favour, no surprise there). Since it is quarterly earnings release season right now, this is the perfect time for me to write this!

"We are happy to report that revenue exceeded analyst expectations and grew 10% from last fiscal."

Nice! This is great news right??!! Depends, in most cases it is but you have to watch out for potential monkey business here. Is the revenue sustainable? What contributed to this surge? And how much did their account receivables go up? Your stock price may not necessarily go up if the revenue was due to a one off event such as a short lived fad. You also have to keep an eye on their credit sales, if they made credit more easily available to their customers then of course sales would increase. However, at the same time the quality of such receivables may have gone down because they had to loosen their lending policies to get people to make purchases. Try comparing the dollar increase in sales with the increase in account receivables, preferably you want the increase in sales to be much greater than the increase in receivables.

"Our sales grew 8% year over year."

Again, we have to look deeper into this and in addition to the above paragraph. How much did the industry sales go up by? If everyone else is growing their sales by 15% and the company is growing at 8%, that means the company is losing market share! That is definitely bad news because when we invest, we don't invest because of what they did in the past, we invest based on our perception of their future and losing market share is not a good sign.

What if they announced that their income grew 8% year over year?

Well then, we have to look at how the increase came about except this time we look at their expenses too. If they had cut back on crucial expenses, such as R&D, rather than deriving it from increased efficiency of operations, then that's bad for future concerns. Sometimes in order to meet bonus thresholds, management may get short-sighted and start cutting expenses that they really shouldn’t be cutting. Typically any major cost reductions and how it was realized can be found in the Management Discussion & Analysis (MD&A) if it's an annual earnings report, otherwise it should be in the press release.

Where am I going to obtain all this information you speak of?...

Many good reliable sources out there, personally I use Google Finance and TD Waterhouse's own investor information platform. TD actually gives you a history of previous earnings per share (EPS) information compared with past analyst expectations, this I think is great because it would take you forever to find all of the previous estimates and EPS info yourself. Haven't tried other discount brokers but I suppose they should have similar information available as well.

Hmm, I should write an article on how to pick stocks, be on the lookout for that in the near future. Good luck folks!

-TT

Why Groupon May Not Be Helping

Found this neat video on Yahoo, offering some interesting ways to curb your shopping habits for those who are slowly getting (or already) out of control:



[ http://ca.finance.yahoo.com/video/why-dump-groupon-050000570.html ]

Long story short, bargain deals and group buy websites may actually be hurting your budget because they bombard you with deals daily. Sometimes you end up buying things that you weren't looking for or even need in the first place! Make sure you stay focused and buy only what you need, think of the realistic benefits from the product before hitting that button.

-TT

Is Your Car a Money Pit?

Whether you're looking to purchase an old car or currently maintaining a relic, there are elements that many of us forget. A well maintained vehicle can easily push you in upwards of 200,000km, while an ill-maintained one may still do so, it will put a much bigger dent in your wallet. Here are three common areas that can save you some cash:

Spark plugs

If they aren't firing properly, typically you will notice poor fuel economy and a sluggish engine. I recently changed mine and surprisingly, I'm fairly certain my fuel economy improved by at least 20%. Driving round-trip to Newmarket used to eat up just over 1/5th of my tank and now it uses about 15% (based on me "eyeballing" it, it would just be awkward if I whipped out the protractor). These spark plugs are inexpensive and the benefits are definitely worth it, especially in winter if your engine refuses to start one day due to bad plugs. For those who are technically savvy, replace them yourself and save even more money. (Preferably using a torque wrench)

Air conditioning system

If your vehicle is older than 5 years, make sure your A/C system has adequate level of Freon. Low levels will cause excessive wear on your A/C compressor because it will engage more often. Not only is the A/C compressor expensive to replace, but it will cause your engine to consume more fuel and rob performance. I was quoted $650 recently by my mechanic, you can expect to be charged more at the "stealership". Your mechanic can probably top off your Freon relatively cheap. If you must do it yourself which I don't recommend because over filling can ALSO cause the same excessive wear situation with your compressor, you can get a can of R12a from Part Source or Canadian Tire. You won't be able to buy R134a or R12 unless you have a mechanic license, but R12a is available off the rack because it isn't as environmentally damaging and you can supposedly mix with the existing R134a or R12. If the leak is bad enough though, be responsible and get that leak checked out, you will save your money and the environment.

Aftermarket rims/wheels

Whether it's because you want to distract others with spinners or because it was a necessity for a set of winter tires, the truth is that most of the garden variety wheels you see aftermarket weigh substantially more than OEM wheels. Not only does this extra weight translate into more fuel consumption, it also means you need to brake harder to stop and thereby consuming more brake pad material. If you're buying a used car, try to stay away from cars with these wheels unless you know for a fact that it's one of the premium lighter selections. If you must go aftermarket for whatever reason, pay attention to the weight per wheel and choose a lighter one if possible. Oh and depending on how much tire sidewall room you have, avoid gravity-cast wheels because they get damaged much easier over potholes.

-TT