Milestone I: Finally, My First Investment!

It has been just over two months since I started this blog, and honestly it seems like a lot longer than that.  Starting off with practically zero knowledge of investing, it was a very daunting task to sort through all of the investment vehicles that are available, especially when the wrong choice can tear through your savings account.  But with the help of some good books and great advice from a few investing veterans I have broken the first barrier.

I am very excited to say that I am finally an official investor! I have invested in the TD e-Series funds, which you can read about here, and I am confident this is a strong decision.  It feels amazing to have made real progress, especially after how uphill the task seemed not too long ago.

This is the final asset allocation I have decided on.  You may notice a lack of small or medium-cap funds, but the e-Series is slightly limited on selection.  It’s somewhat of a loss, but for now the low MERs more than make up for it.

TD CDN Index-e (S&P/TSX Composite) 30%

TD US Index-e (S&P 500) 25%

TD International Index-e (MSCI EAFE) 25%

TD CDN Bond Index-e (DEX Universe Bond) 20%

There we have it.  I will be adding money to these funds every month, and re-balancing when any fund gets +/- 5% of it’s original allocation (I will talk about re-balancing in an upcoming post).

Any questions?

Project Part V: How and Why I Opened a TD e-Series Fund Account

Finally, after much deliberating, lots of hoop jumping, and plenty of patience, my investment account is open.  I have decided on the TD e-Series account, which you can read about here

Basically, the account allows you to invest in a handful of index funds online rather than in the branch.  The major perk of this is that the management expense ratios (MERs) are significantly lower than the Investor Series equivalent.  The highest MER is 0.52 and in general they are about 0.50 lower than what you would otherwise be able to get.  You can read the comparisons here.  As you can see, there aren’t too many indexes to invest in - a noticeable absence is a small-cap fund - but it is a good start for a new investor.

One of the main criticisms about mutual funds is that you can purchase ETFs instead, which follow the same indexes but trade like stocks and have much lower MERs.  However, because they have to be purchased through brokers, there are other fees to consider.  In general though, it is believed that the lower MERs make up for the broker fees, making them more desirable than traditional mutual funds.

This is one of the points expressed in Rob Carrick’s Guide to Canadian Investments (which I highly recommend, by the way.  Review coming soon.) However, he goes on to say that one exception is the TD e-Series funds. Because of the extremely low MERs, the difference between them and an ETF with broker fees is minimal, and therefore it is up to the individuals’ preference.

How to open the account

The e-Series account is obviously a gem of an investment.  Unfortunately, it isn’t the easiest account to set up.  In fact, if you go in branch to set it up, most employees will not know what an e-Series fund is, and the ones that do will dismiss it as a poor choice (probably due to the fact that low MERs lead to less profits for them) and it won’t be a pleasant experience.  So after reading advice from around the internet, here is what I did.

1. Your account will have to be registered for TD Easyweb.  Go into the branch and ask to set it up, they will give you a temporary password which you will have to change in 24 hours.  It’s very easy, and easyweb is invaluable for banking convenience.
2. I set up a Mutual Fund TFSA.  This can be done in the branch, and it takes about 30 minutes.  You have to go through and answer a bunch of questions about your risk tolerance and investment expertise, which will result in them giving you a recommended mutual fund.  You should tell the agent that you simply want to open the account, and you don’t want to buy anything at this point.  After a day or two the account should show up in Easyweb.
3. You will want to visit this page, click the “Convert an Account” button, and fill out the form.  It requires an original signature, so print it out, sign it, and mail it to the required address.  After they receive the mail, it takes a few business days to go through.  You will know your account has been converted to an e-Series account when the number “2378” is before your Mutual Fund TFSA number on Easyweb.
4. When you see this number, call the TD mutual fund department and explain that you want to purchase your first e-series funds.  For some reason, I was told that you have to purchase your first funds over the phone.  After that, you can do everything online yourself.  It will take about a day to make the purchase go through.

And then you’re done! There are a lot of hoops you have to jump through, but in the end you get access to funds that will give you superior returns than the traditional Investment Fund.

Thankfully I read a lot of advice regarding setting up the account before I tried myself, and hopefully this guide will help others in the same way.

Review: The Big Secret for the Small Investor

As I became more knowledgeable on the basics of investing, especially index fund investing, I thought I would pick up a book that had a different approach to broaden my perspective.  Although I tend to dismiss books that advertise having a “secret” that changes everything and will put you ahead of the game, the author if this one had written some well received books in the past, so I thought I would give it a shot.

The book begins by explaining the inferior performance of the major index funds (as expressed in my previous post) and then discusses how we can make changes in our strategy to gain better returns.  The author takes the approach that we should buy things that have greater intrinsic value than what we are paying for them, which occurs because of the emotions of investors.  This is actually the basis of value investing.  However, to do this we must be able to discern the value of a stock, and he makes it very clear that it is extremely difficult to do even for professionals.  The authors’ “big secret” is to invest in something called a value-weighted index, which takes advantage of the fact that emotions often over/under-estimate the value of a stock, and picks companies that are expected to under-perform in the future.  When the stock values bounce back to reflect their actual value, the index wins.

I almost feel like I should have a spoiler tag on this post, because this book reads much like fiction in that the whole book is leading you to the final “secret”, which is only talked about for maybe 20 pages.  Although it somewhat seemed like the rest of the book was filler, it provided good information about the difficulties in valuing stocks, the drawbacks of capitalization-weighted stocks, and the other index options out there.  The tone was very informal, which was good in a way because it was easy to read, but also a tad disappointing in terms of being a challenge; the book is filled with anecdotes that help relate the lessons the author learned in his life to investing, but again this feels like wasted space that could have been used for more rigorous material.

Pros:

• A good introduction to value-investing.  The information leading up to the final secret helps you understand why this approach is difficult, and some easier ways to go about it
• A short read.  At under 150 pages with big text, the lack of rigor can be excused by how fast you can learn the the main points of the book and move on
• The informal tone makes it very easy to read, which is refreshing after reading textbooks all day

Cons:

• It is only an introduction to value investing, there is a lot more to be learned from more definitive sources
• The informal tone gets annoying when I am ready to learn a lot of material but am presented with stories and something resembling a conversation instead

Conclusion:

All in all, every con for this book could be seen as a pro, depending on your perspective.  If you want an introductory book to value investing that isn’t intimidating, it is the book for you.  If you want a more thorough guide than you might want to skip it and look for something else.  For me, the quick read was definitely worth it if only just to broaden my horizons about what strategies are out there and the benefits they have over what I am doing.  Especially for my project, perspective is always a good thing.

Value Investing and the Disadvantage of the Major Index Funds

If you’ve been following along so far, you surely have noted the influence I’ve received toward no-load index fund investing.  Everything I read suggests this strategy for the majority of investors, with names such as Warren Buffet and Jack Bogle lending their wisdom.  There are however a certain group of people, known as value investors, that note an inherent flaw with how the big index funds, like the S&P 500, are structured.  Before you dismiss this group of investors you should understand that the father of value investing, Benjamin Graham, wrote what is now often referred to as “the bible for anyone serious about investing.”  He was also the teacher of Warren Buffet.

That’s right, Warren Buffet, who I have quoted as stating that the majority of people will gain the most from index funds, does not actually feel this is the best sort of investment.  Warren Buffet is a value investor.  Now before you call shenanigans,  I believe the reason he is quoted being pro-index funds is that it is a very simple way of investing that requires very little committed time.  Therefore, for the majority of people, it is the ideal investment vehicle.  That doesn’t mean it will produce the best returns, but it is most appropriate considering the lifestyle of the masses.

So what is this flaw in the big index funds?

The S&P 500, Russell 1000, the NASDAQ Composite, are all known as Capitalization-weighted Indexes.  This means that each stock in the index is not weighted equally, but rather based on how large their market capitalization is.  In effect, the largest twenty companies in the S&P 500 only account for 4% of the number of companies, but represent about one third of the market value of the index.  Therefore, the index is influenced much more by any of these twenty companies than by any of the other 480.

In fact, the indexes are efficient in that the weighting of any company will automatically increase when their stock price increases, and the weighting will decrease when the stock price drops.

But why can this be bad?

By now we understand that the price of a stock doesn’t always reflect the actual value of that stock.  In fact, it often represents the emotions of the investors more than the value.  You may have put two and two together that when these over-valued stocks increase in price due to hype or emotions, their weighting in the capitalization-weighted indexes rise.  The index is then faced with greater influence by these overpriced stocks.  If you were invested in the NASDAQ bubble in 2000, I don’t have to tell you why this is a problem.  How well does an index that is full of over priced internet stocks do when the bubble bursts?  Only now is the NASDAQ recovering to it’s original value, and that’s more than 10 years later.

By their structure, the S&P 500, Russel 1000, the NASDAQ Composite, etc. will be composed of more over priced stocks and less under priced stocks, and will therefore be innately inferior.

Instead, value investors suggest that you buy shares that appear under priced, or in other words are priced less than their intrinsic value.  This obviously requires much more work and expertise than simply investing in the S&P, which is why it’s probably not the best route for the masses.  However, if done correctly the returns can be much greater, so it is definitely worth a look.

It should be said that not everybody agrees with value investing.  It would be wise to check out some of the criticism on both sides (you can find the basics on Wikipedia) and make up your own mind about what makes sense to you.

If you want to know more about value investing, check out “The Intelligent Investor” by Benjamin Graham, or the book I just read: “The Big Secret for the Small Investor” by Joel Greenblatt or his website

Tip: Protect Yourself from Selling Prematurely by Valuing your Investment Returns by your Initial Investment

We all know that the stock market is volatile, so by definition the value of your portfolio will jump around in the short run.  However, it seems almost human nature to be disappointed when your inflated stock value drops to a reasonable level, even though it is pretty much destined to do so.  This thought process may discourage you and you may be tempted to sell, even though these are just the natural rhythms of the market!

So how can you avoid this error in thinking? Let’s say you initially invested $1000 in a stock that was speculated to grow quickly.  The stock then grew to an overvalued level of $1500 before dipping back to $1200.  Instead of being disappointed that you “lost” $300, by valuing your investment returns by your initial investment you can be reasonably happy that you gained $200.  This type of thinking acknowledges the fact that stock prices often become over/under valued, and encourages you to stay calm when they do.  This mindset is especially important for those who are following a buy & hold strategy, and are hoping on the gradual growth of the market to provide their returns.

Although changing how you think can seem easier said than done, what can help with incorporating this strategy is to check your stock values infrequently.  By setting a comfortable interval for when you check your stocks you can avoid being exposed to the constant ups and downs of the market, and you can appreciate a more realistic value of your portfolio.

By holding onto your stocks through short term fluctuations you can avoid stress, unnecessary fees, and disappointment when the value eventually bounces back.

Review: The Bogleheads Guide to Investing

The Bogleheads Guide was the first book I picked up on personal investing, and I am very happy with that decision.  Let’s break it down.

Pros

• Very readable.  The language used is very clear and casual - they do not over use technical terms and they explain things well enough that I was able to understand everything they were saying with essentially no prior knowledge.
• Concise information.  This book is chalked full of relevant information that is important for both beginners and seasoned investors alike;  I was honestly excited after every chapter at the new topics I had under my belt.
• Fantastic advice.  Not only do they explain the basics of investing, they give very sound advice based on the combined years of experience from the three authors.  I often found myself shocked at the misinformation I believed before reading this book, and I now have a pretty clear idea of the best way to invest to achieve my goals.
• Lots of evidence to back up their facts.  One of the best things about the book was the sources and studies they included in text.  Many of their hard-hitting facts were backed up by several studies that are difficult to dismiss, and incredibly interesting to read.
• At the end of several chapters the authors included a list of quotes by various experts. I found these relevant, interesting, and they reinforced the topics being discussed.  They also provided a good source for further reading.

Cons

• Everything is based on investing in the United States.  This is the only complaint I had; it was the first book I read so I wasn’t confident in what advice would translate well to Canada.

Conclusion

When I chose to start my project by reading this book I had no idea how much I would learn, or even if I would be able to finish it without getting bored.  I can safely say that this book has propelled my interest in investing so much further than I thought was possible.  The sound and practical advice in this book has given me such a rock-solid start on investing that I will judge everything I read from now on by it. 

Instead of feeling lost about investing I am now excited at the level of confidence that I have received from only one book.  If you are even vaguely interested in understanding investments, you owe it to yourself to give The Bogleheads Guide to Investing a try;  I guarantee you will not regret it.

Rating: Highly recommended

Review: Investing for the First Time (Canadian Dollars & Sense)

After I realized that most of what I was reading was based on investing in the United States, I wanted to gain some Canadian perspective.  This was the only book I found at Chapters that was obviously Canadian, so I picked it up for just over $10.  Let’s break it down.

Pros

• Good basics.  Although I am already familiar with them, the very basics are laid out here quite well. 
• Obviously, it’s Canadian! All the theory and examples given are relevant to Canadian investors.  I actually learned some relevant stuff about RSPs and TFSAs, which was nice.

Cons

• Very short.  The whole book is barely 100 pages, so there isn’t much detail on any one subject, and they cover nothing more than the very basics
• No advice.  Although there is theory in these pages, you won’t find any real advice or strategy like presented in the Boglehead’s Guide to Investing
• Felt similar to reading a textbook.  A minor detail, but I didn’t feel like there was a human voice behind the words.  It wasn’t boring or overly technical, but no personality in the least.

Conclusion

I started this book because I had learned a lot from American resources, but wasn’t sure what would apply to Canadian investing as well.  In that regard, the book was useful.  I am now more familiar with the opportunities that us Canadians have, and I feel like I will have an easier time applying advice I read in American books.  However, in the end the book was far too basic.  It is very clear that the content was, as the title suggests, for the first time investor, so maybe I am being too harsh.  But even for an introduction book it does nothing to point someone in the right direction based on the goals they want to achieve.  It’s theory, and that’s all.

Rating: If you are a first time Canadian investor and want to know some basics before trying to figure out a strategy, the quick read might be worth your time, but I’m sure you could do better.

Project Part IV: A Lot of Waiting

A few weeks ago I had a queue nearing 20 posts ready to publish one a day, and no shortage of time to up that number faster than it could drop.  Skip to today and it has been 5 days since my last post.  Yes, summer vacation is over and it is back to school.  Unfortunately that means I have less time to read, resulting in less I have to post about.  On the plus side, I live right across from my TD bank so I have made some progress there!

After waiting for the forms to make it to TD, my TFSA was finally registered and $1000 was deposited as an initial investment.  While I did open the account with the idea of putting away money to invest, I figured I would also use the account as a tax-shelter to hold my investments once I started.  Unfortunately, I opened the wrong account.  I opened a “TFSA Savings Account” rather than a “Mutual Fund TFSA”.  Frustrating, but I went over to the TD today and got it switched to the right account without any trouble.

I did not purchase any mutual funds just yet.  Instead, I have made the decision to invest in the “e-series funds” that TD offers.  This is an account where you can purchase mutual funds completely online.  Not only convenient, this also reduces the expense-ratio for the available mutual funds to under 0.5.  You can only invest in index funds, but as that is what I wanted to do to begin with, it is the perfect opportunity.

So my next step is to mail in forms stating that I want to convert my Mutual Fund TFSA to an E-series fund.  It is unfortunate that I have to mail the forms in and jump through hoops by first opening a mutual funds account and then converting it, but I will discuss that frustration in an upcoming post.

Other than that I am saving money consistently, cutting back on unnecessary spending, and taking a Mathematics of Finance course at the University.  I hope I’ll learn some cool stuff from the course, but I guess we’ll see!

Stay tuned.

The "So-Called" Experts Part IV: Think Twice about Trusting Certain Advisors

Although I am a fan of do-it-yourself investing, I’m sure many people would be more comfortable hiring an adviser of some kind to invest their money.  The assumption would be that someone with expertise would have better information and would be able to make better decisions than the individual could.  Some might look for people with titles such as:

• financial analyst
• financial consultant
• financial planner
• investment consultant

If you would automatically put your trust in anyone with one of these titles, DON’T. 

According to the U.S. Securities and Exchange Commission:

“Anyone can use these terms without registering with securities regulators or meeting any educational and experience requirements”

That means anyone can literally print out a business card with their name on it and any one of those titles and be in business.  Scary, isn’t it?  Before reading that, I would have probably taken advice from one of those “professionals” with more weight than it would deserve.

So who can you trust?

I accept that some people are more comfortable with an adviser handling their investments.  If that is you, try looking into hiring someone with the title:

• Chartered Financial Adviser (CFA)

• Certified Financial Planner (CFP)

Both of these titles require significant training and completion of intense comprehensive exams.  In particular, the CFP must master over 100 financial planning topics, and the CFA must have 750 hours of study and pass three exams.

In general it is a good idea to ask a potential adviser what they’re qualifications are, what they studied in school, and what related work experience they have had.  If they’re answers don’t make you comfortable enough to let them handle your money, look for another; there are plenty of well qualified advisers out there.

"Buy and hold is a dull strategy.  It has only one little advantage - it works, very profitably and very consistently.

- Frank Armstrong, author of The Informed Investor

The "So-Called" Experts Part III

“From 1982 through 2006, top economists in the United States were polled for their interest rate forecasts.  The experts were correct in identifying the DIRECTION that the interest rate would move only 1/3 of the time; they were better off guessing.”

FINANCIAL CONSUMER AGENCY OF CANADA

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