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Ready to invest - but where
Old 07-12-2006, 08:13 PM   #1
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Ready to invest - but where

Here's my situation

30 years old
Mortgage - 45,000
Savings account - 50,000
Retirement accounts - 35,000 (yea pathetic)

I am planning to pay off my mortgage in a couple of months which would free up another $300 a month for me. I am very debt averse and do not want to hear arguments about investing this rather than paying off the mortgage. I also live in Canada so I get no tax deduction from my mortgage.

After all my expenses I will be able to invest approximately $3000 per month and I plan to do so. Currently besides my work retirement accounts, all my investments are with one of my bank's mutual funds. Should I remain with my bank and invest in their family of mutual funds? Can anyone in Canada recommend a good mutual fund company as an alternative? Should I maybe go see a financial planner and work with that person exclusively? I am not sure what my next step should be. My goal is to retire at 50.
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Re: Ready to invest - but where
Old 07-12-2006, 09:50 PM   #2
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Re: Ready to invest - but where

I am a Canuck as well, now retired (just 2.5 months ago). I fully agree from a Canadian perspective to pay off mortgage first.* There are some financial advisors who would argue that you should contribute as much as you can to an RRSP to take advantage of decades of compounding and use the tax refund to help pay down your mortgage.* However, I chose to: 1) pay off the mortgage first, and then 2) invest in RRSPs as much as the limits allowed, and then 3) into non-registered accounts.

There is also a good Canadian forum called Financial Webring Forum http://financialwebring.com/forum/ that has lots of good DIY advice.* You will see references to Shakespeare's Primer and you will also see an article on Financial Management at the top of the Forum.* You will find that most investment savy people in Canada believe in index funds and ETFs mostly.* Actively managed funds have high costs (MERs) that are on average about 1% more than USA actively managed funds.* They are not a good idea because ultimately costs do matter.

Working with a financial adviser that is part of a major brokerage is a recipe for high costs (commissions), not always the best products and sometimes in a conflict of interest.* You would be better off with a fee-only planner (by the hour) if you want some guidance (after you have done a bunch of recommended reading).* A professional financial advisor can only help you when you have some idea what you want out of life and what your tolerance for risk profile is (i.e. asset allocation and diversification).

I also do not believe in a bank's mutual funds because: 1) the advisers really are not professional advisers - they are employees employed to push/sell product, and 2) most carry high MER actively managed funds. Having said that, a few of the funds from banks are not that bad in performance.

You might be surprised how well you can make your own decisions as a DIY investor using a discount broker, e.g. E*Trade. Another good discount brokerage is TD Waterhouse and you would have access to their low cost eFunds there too.

If you do want to work with a mutual fund company exclusively, then PH&N out of Vancouver is probably one of the best (for Canadian based investments anyay). Their MMF and Dividend Income funds are among the very best. In any event, I would suggest you spend some time on this forum and on FWF and you will find something that works for you.* You have time on your side. Most people do not think about investing and preparing for their future at such a young age.
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Re: Ready to invest - but where
Old 07-12-2006, 10:03 PM   #3
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Re: Ready to invest - but where

Quote:
Originally Posted by AltaRed
I am a Canuck as well, now retired (just 2.5 months ago). I fully agree from a Canadian perspective to pay off mortgage first. There are some financial advisors who would argue that you should contribute as much as you can to an RRSP to take advantage of decades of compounding and use the tax refund to help pay down your mortgage. However, I chose to: 1) pay off the mortgage first, and then 2) invest in RRSPs as much as the limits allowed, and then 3) into non-registered accounts.

There is also a good Canadian forum called Financial Webring Forum http://financialwebring.com/forum/ that has lots of good DIY advice. You will see references to Shakespeare's Primer and you will also see an article on Financial Management at the top of the Forum. You will find that most investment savy people in Canada believe in index funds and ETFs mostly. Actively managed funds have high costs (MERs) that are on average about 1% more than USA actively managed funds. They are not a good idea because ultimately costs do matter.

Working with a financial adviser that is part of a major brokerage is a recipe for high costs (commissions), not always the best products and sometimes in a conflict of interest. You would be better off with a fee-only planner (by the hour) if you want some guidance (after you have done a bunch of recommended reading). A professional financial advisor can only help you when you have some idea what you want out of life and what your tolerance for risk profile is (i.e. asset allocation and diversification).

I also do not believe in a bank's mutual funds because: 1) the advisers really are not professional advisers - they are employees employed to push/sell product, and 2) most carry high MER actively managed funds. Having said that, a few of the funds from banks are not that bad in performance.

You might be surprised how well you can make your own decisions as a DIY investor using a discount broker, e.g. E*Trade. Another good discount brokerage is TD Waterhouse and you would have access to their low cost eFunds there too.

If you do want to work with a mutual fund company exclusively, then PH&N out of Vancouver is probably one of the best (for Canadian based investments anyay). Their MMF and Dividend Income funds are among the very best. In any event, I would suggest you spend some time on this forum and on FWF and you will find something that works for you. You have time on your side. Most people do not think about investing and preparing for their future at such a young age.
Thank you, a lot of useful information here.

Agree entirely on your steps 1,2 and 3. Besides, the security of knowing that you own your house outright will be amazing while others are paying $1000+ monthly mortgage payments + probably another $1000 a month in CC and car loan payments per month....to each their own I guess.

I am assuming that you have a self directed RRSP account? Would I only have to open up one of these at one institution. For example if I open a self directed RRSP at say Scotia McLeod, could I then invest in some PH&N funds, some Altamira funds, some stocks, etc? I still am not clear as to what the advantages of having a self directed RRSP are? Could I not just open a RRSP account at each of these places and save the couple hundred dollars of having a self directed account?
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Re: Ready to invest - but where
Old 07-12-2006, 10:34 PM   #4
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Re: Ready to invest - but where

Quote:
Originally Posted by accountingsucks

I am assuming that you have a self directed RRSP account?* Would I only have to open up one of these at one institution.* For example if I open a self directed RRSP at say Scotia McLeod, could I then invest in some PH&N funds, some Altamira funds, some stocks, etc?* I still am not clear as to what the advantages of having a self directed RRSP are?* Could I not just open a RRSP account at each of these places and save the couple hundred dollars of having a self directed account?
I have a self-directed RRSP. Depending on size and depending on whether you also do your non-registered investing at the same place, most brokerages will (might) waive annual fees. Scotia McLeod, like any full service broker, may want to see a 6 digit account first (e.g. $100k) to waive fees - would need to ask.

You could do the same thing with much more flexibility at E*Trade pr TD Waterhouse or Action Direct, etc where you can buy (and sell) ANY mutual fund you want at zero cost, including PH&N. You cannot buy PH&N at Scotia McLeod, BNO, RBC, etc. and you will be charged either front end fees or back end fees to purchase/redeem mutual funds at full service brokers. BTW, E*Trade does not charge a fee for self-directed RRSPs https://www.canada.etrade.com/pages/home/fees3.shtml

You can have a series of RRSP accounts at different institutions and potentially save on an annual administration fee. But then it makes it administratively difficult and time consuming to transfer to a different institution if you wish to do that at a later date (e.g. you no longer like Altamira funds and wish to sell your investments there and transfer that account). My RRSP contains bonds, GICs, mutual funds, T-bills. Generally speaking I keep tax inefficient investments (like interest bearing) inside the RRSP and tax efficient investments (e.g. Canadian dividends, capital gains, REITS, Trusts) outside the RRSP.

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Re: Ready to invest - but where
Old 07-12-2006, 10:49 PM   #5
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Re: Ready to invest - but where

Quote:
Originally Posted by AltaRed
I have a self-directed RRSP. Depending on size and depending on whether you also do your non-registered investing at the same place, most brokerages will (might) waive annual fees. Scotia McLeod, like any full service broker, may want to see a 6 digit account first (e.g. $100k) to waive fees - would need to ask.

You could do the same thing with much more flexibility at E*Trade pr TD Waterhouse or Action Direct, etc where you can buy (and sell) ANY mutual fund you want at zero cost, including PH&N. You cannot buy PH&N at Scotia McLeod, BNO, RBC, etc. and you will be charged either front end fees or back end fees to purchase/redeem mutual funds at full service brokers. BTW, E*Trade does not charge a fee for self-directed RRSPs https://www.canada.etrade.com/pages/home/fees3.shtml

You can have a series of RRSP accounts at different institutions and potentially save on an annual administration fee. But then it makes it administratively difficult and time consuming to transfer to a different institution if you wish to do that at a later date (e.g. you no longer like Altamira funds and wish to sell your investments there and transfer that account). My RRSP contains bonds, GICs, mutual funds, T-bills. Generally speaking I keep tax inefficient investments (like interest bearing) inside the RRSP and tax efficient investments (e.g. Canadian dividends, capital gains, REITS, Trusts) outside the RRSP.

Thanks again - you mention keeping tax inefficient stuff inside the RRSP which is a great idea. I rarely see this talked about anywhere but it is very important. I guess most people would do well just maxing their RRSP accounts. I am a Chartered Accountant so I understand these ideas.

Now regarding E-Trade, I followed the link to their fee page. How exactly do they make money on an account? You mention there are zero costs in buying or selling funds with them. There appears to be a $50 monthly "safekeeping" fee though. Would something like E-trade be subject to federal laws...I would just be worried about moving large sums of money through something that was not a "brick and mortar" operation.
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Re: Ready to invest - but where
Old 07-12-2006, 11:08 PM   #6
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Re: Ready to invest - but where

Quote:
Originally Posted by accountingsucks
How exactly do they make money on an account?* You mention there are zero costs in buying or selling funds with them.* There appears to be a $50 monthly "safekeeping" fee though.* Would something like E-trade be subject to federal laws...I would just be worried about moving large sums of money through something that was not a "brick and mortar" operation.
Using E*Trade as an example, they make their money in 2 ways: 1) in mutual funds, the fund companies pay brokerages a trailer fee on an annual basis, which is usually 0.5% of the asset value, and 2) for equities, the trade cost of $19.99 per trade.

The trailer fee for a mutual fund is not transparent to you because it is part of the underlying fund's MER, e.g. a fund with an MER of 1.5% includes the trailer fee paid to E*Trade on a quarterly basis. Note the fine print under fees says that E*Trade will charge you a 1% fee if you do not hold a mutual fund for at least 90 days - that is so that E*Trade gets paid at least one quarterly trailer fee for its trouble.

I do not know what the safekeeping fee applies too. I think that is only if they keep share certificates in your name on your behalf, but not if the shares are kept in street name which is the way 99% of business is done. I've never been charged a safekeeping fee or any kind of an account fee at E*Trade or any broker.

Lastly, you will note that for non-registered accounts, there is a 'low activity' fee (note 3) that could be charged if the account is inactive or is very small. That is a reasonable request to take care of the monthly 'back office' accounting that has to be done...with potentially negligible revenue coming in. I've never been charged a low activity fee.

Regarding safety, check account protection link https://www.canada.etrade.com/pages/home/secpro2.shtml . In my view, E*Trade is likely no more, nor no less, secure than any major broker, all of whom belong to CIPF.

Caveat: I am not promoting E*Trade over any other discount broker. I only use them as an example because I have an account with them.
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Re: Ready to invest - but where
Old 07-13-2006, 12:08 AM   #7
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Re: Ready to invest - but where

Some additional thoughts regarding the 'where' part of your original question.

This link on Financial Management (Planning) will give you a good start http://financialwebring.com/forum/vi...c.php?t=101652

The first thing is to understand your risk profile if you have not already done so by completing one or more profile templates, some of which are referenced in the link above. It is very easy to say you can accept a lot of risk, but a 20% correction will test your own knowledge of yourself. People generally overestimate their risk tolerance.

Secondly, if you invest using professional advice, e.g. full service broker, bank mutual funds, etc., it is required that you complete an Investment Profile Statement (IPS). Both you and the advisor have a legal obligation to comply with that statement with respect to your investing choices.

Thirdly, you asked about good mutual fund families. Actively managed equity funds in Canada typically have MERs averaging 2.5%. That is a huge amount of leakage and many studies and papers have been done to prove that costs matter, i.e. over time such funds eventually underperform the market. A good actively managed equity fund in Canada may have an MER as low as 1.5%. The PH&N, Trimark, Saxon, Mawer, Mclean Budden and some other families have MERs in this range. BUT other than Trimark, you will almost never get a full service broker, e.g. BMO, Scotia McLeod, RBC, etc to buy them for you because they don't get enough in fees from these fund companies!!!

The better alternative is use of index equity mutual funds or ETFs which all have expense ratios under 1% and the best ones are less than 0.5%. Barclays Ishares is the big name in ETFs in Canada and are bought and sold just like stocks. ETFs tend to work best for larger sums to absorb trading costs (like stocks) while index funds tend to work best for people investing small amounts at a time.

It is almost criminal to purchase actively managed bond or balanced mutual funds in Canada. The MERs eat up much of the 'fixed income' portion of the returns. It is best to stick to an index bond fund or a Barclay's ETF or your own individual bond ladder or GIC ladder for your fixed income component.

Lastly, Globefund has a good "filter" to use to rank and classify mutual funds http://globefunddb.theglobeandmail.c...l/gis.analyser for your own due diligence. I would be careful of the '5 star' rankings though on Globefund since they are leveraged more to short term performance rather than long term performance.
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Re: Ready to invest - but where
Old 07-13-2006, 09:23 AM   #8
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Re: Ready to invest - but where

Hi AccountingSucks,

I am also a fellow Canadian. AltaRed has given you good advice. I did the same thing as both of you. Paid off the mortgage first (guaranteed return) and then invested. This makes sense with our tax system. The best approach I have found is the self-directed route with a discount broker. On the equity side, I have a mix of ETFs and mutual funds for the areas where professional managers tend to do a better job (small caps, international value, alternative investments). On the fixed income side I have a combo of individual bonds, GICs, ETFs, preferred shares, cash. You should spend more time thinking about what you want your asset allocation to be. I like 30% cdn equities, 20% international (less in the US now because of their deficits, shrinking dollar etc.), 30% bonds, 10% REITs, 10% cash. This sight has good info on asset allocation, portfolios:


http://www.shakesprimer.com/


Hope this helps - wish I knew all this at your age.

Joanne
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Re: Ready to invest - but where
Old 07-13-2006, 07:03 PM   #9
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Re: Ready to invest - but where

Some great info - thank you. It answers a lot of the questions I had. In terms of online places like E-trade, how safe do you think they are? What happens if E-trade goes belly up. Would the funds I have invested through them in various investments be at jeopardy. I would assume not since they are merely an intermediary.


Oh also, do you guys have any other recommendations besides E-trade for an online account. I have done a bit of research and it's not favorable

http://www.dogsofthedow.com/etradefeed.htm
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Re: Ready to invest - but where
Old 07-14-2006, 12:05 AM   #10
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Re: Ready to invest - but where

Quote:
Originally Posted by accountingsucks
Some great info - thank you.* It answers a lot of the questions I had.* In terms of online places like E-trade, how safe do you think they are?* What happens if E-trade goes belly up.* Would the funds I have invested through them in various investments be at jeopardy.* I would assume not since they are merely an intermediary.


Oh also, do you guys have any other recommendations besides E-trade for an online account.* I have done a bit of research and it's not favorable

http://www.dogsofthedow.com/etradefeed.htm
As for protection, I believe all discount brokers are members of CIPF to protect assets. Besides they only hold the assets, they don't have access to them. Do your research on just what CIPF provides.

You need to look at Canadian discount brokers, not US discount brokers. Different organizations in different countries. Look up Rob Carrick's Sept 10/05 article in the Globe and Mail for latest discount broker survey. Scores in descending order out of 10 being best:

BMO Investorline 8.5 (A+)
E*Trade Canada 8 (A)
TD Waterhouse 7.75 (B+)
QTrade Investor 7 (B)
Credential Direct 6 (C)
CIBC Investor's Edge 6 (C)
Scotia McLeod Direct Investing 5.75 (C-)
RBC Action Direct 5.75 (C-)
etc, etc......
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