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Mutual Fund and RRSP Advice - EMC

Efficient Market Canada is an independent investment magazine for Canadian mutual fund, exchange traded fund (ETF), and self-directed RRSP investors. We translate investment research into practical advice for ordinary self-directed RRSP investing, with fo


Canadian living in the USA: Your RRSP, TFSA, and the IRS
If you are a Canadian who lives and works in the United States, or are considering moving to the USA for work, there are a few things you should know about how the IRS will treat your Canadian RRSP, your Canadian TFSA, as well as your RRSP, and a few comments on what may become of your Canadian real estate when you move to the United STates. There are a couple of real gotcha's here!

TFSA versus RRSP: What assets should I put in my TFSA?
When deciding which account to use for which asset class, you should put Canadian equity ETFs in your TFSA, and US ETFs add well as bonds in your RRSP. Let's look at the reasons why, and some of the edge cases that arise where this advice is wrong.

Is an RRSP contribution better than a non-registered investment or a mortgage payment?
A recent article in the Toronto Star says "Disciplined savers who do not need the tax deduction are probably better served by keeping their investments in a non-registered account."(1). Is it true? Are people really better off saving money outside of an RRSP? Some say buying and holding growth stocks that pay no dividends is another way to defer taxes, and that investments in an RRSP lose access to the dividend tax credit. Others say that it's better to repay your mortgage than invest in an RRSP. There are a lot of people out there who say things like this and they are almost always wrong. The arguments for non-registered investments generally involve a lot of handwaving and grand claims so let's break it down and look at the numbers. First we'll look at buying stocks in and out of an RRSP, then we'll compare an RRSP to a mortgage payment.

Building A Globally Efficient Index ETF Portfolio (updated)
Last year I recommended building your RRSP with low cost efficient global indexed ETF 's by allocating funds in your RRSP to index ETF's based on global market capitalization. In my opinion there isn't much more to say about equity investment--that's still what most people should do with their RRSP. However, it's time to update the data a little. What's the market cap breakdown look like in 2007? Also, there are three new low cost Vanguard index ETF's available to track foreign markets: VGK, VPL, and VWO. We'll have to revise our approach slightly to work out how to fit VGK and VPL in.

Remember to file your T1213
Happy New Year! One of the things you may have noticed recently is that rather large deduction of federal tax on your first pay stub of the year. Assuming that you contribute the maximum to your RRSP some of that money still belongs to you. You've just lent it, interest free, to the federal government until sometime next April. You don't want to do that. The solution is to file a Form T1213, Request To Reduce Tax Deducations At Source. Yes, it's nice to get a big refund at the end of the year, but it's even nicer to have that money all year long. A bigger monthly paycheque makes it easier to hit your personal savings target.

Building A Globally Efficient Equity Portfolio with Exchange Traded Funds
According to modern financial theory capital is allocated efficiently to global markets overall. That is, the total market capitalization of both companies and countries is roughly optimal. This is the theory behind index funds that are weighted by market capitalization. The overall maximally efficient RRSP portfolio would be to hold a global portfolio of equities roughly in proportion to global market capitalization. How would one go about doing this in and RRSP in a cost efficient manner? In this article I'll look at the breakdown of global market capitalization and discuss the factors that would affect your own particular global equity RRSP allocation. We'll conclude with a list of Exchange Traded Funds (ETFs) that would suit this allocation, and the proportion of your portfolio that you could consider allocating to each of ETF.

Changes to Barclays Canadian iShares XIC, XDV, and XTR
This is the third and final article on recent changes to the Barclays Canadian iShares (formerly iUnits) exchange traded funds. With respect to the Canadian equity market, there are three important changes to the Canadian iShares ETFs: Income trusts have been added to the TSX equity index (XIC), and there are two new equity index ETF's: A Canadian iShares fund specializing in dividend income (XDV) and a Canadian iShares fund specializing in income trusts (XTR). What do these changes to the Canadian equity ETF's mean for investors? The change to XIC is excellent news. The new XTR and XDV funds may be useful for some investors, but the average investor is better served by a straight equities index like XIC.

Changes To Barclays iShares: XSB and XRB
Barclays has announced changes in its line-up of bond exchange traded Canadian iShares (formerly iUnits) funds, in addition to many other recent changes. Unlike the changes to XSP and XIN Canadian iShares ETFs, the changes to the bond ETFs are across the board good news for Canadian investors. XSB is what the former XGV has become: The 5 year govt. bond Canadian iShares ETF is changing into a general short-bond index. Canadians have needed an efficient way to invest in short-bonds for some time. The other new bond fund, XRB, will be some sort of real-return bond index ETF. While the details remain to be seen, adding some real return bonds to your portfolio is probably a good idea.This is the second article in a series of reviews of the new Canadian iShares ETF's.

Changes To Barclays Canadian iShares: XSP and XIN
Barclays has announced changes to several of its Canadian iShares exchange traded funds (formerly iUnits), including the XSP/i500R iUnits, and XIN/iIntR iUnits funds. The fees and the investment objectives of each exchange traded fund is changing. Since I had previously recommended these Canadian iShares funds to self-directed RRSP investors it is time to analyze the implication of these changes. This is the first of a series of articles--subsequent articles will look at the changes to other Canadian iShares funds.

Do Mutual Fund Managers Have an Inherent Conflict of Interest?
Mutual fund managers may have a conflict of interest because of the way they are paid. In particular, mutual fund managers are encouraged to make risky investments that are not in the interests of unit holders, and to over-concentrate their holdings. Mutual fund investors, on the other hand, would tend to benefit from less risky investments, and greater diversification. This article will explore this conflict of interest and its implications for investors who buy actively managed mutual funds.

The Intelligent Asset Allocator
William Bernstein's Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk is an excellent introduction to modern portfolio theory and other modern theories of investment: one that anyone can read. Bernstein has a deep understanding of the academic literature, and a skillfull way of explaining it all in terms that anybody can understand. You'll learn how to adjust a portfolio to compensate for risk and about the theory of asset allocation in light of real world market behavior.

Closet Margin Traders: Mortgage Loans and Stock Market Risk
Most people believe that buying stocks on margin is a silly thing to do: Everybody knows you might get a margin call that turns your heavily margined position into pocket change. The guys who jumped off buildings in the 1929 market crash were mostly margin traders--not smart, right? You'd never do that, right? Yet many of you are closet margin traders! You've mortgaged your home to the hilt, and you've risked the borrowed money in the equity market. You pretend it isn't margin trading, but it is: You are taking on the same risks that sent people hurtling from buildings in 1929. This is a wake up call: Please understand the risks you are taking. This is an especially urgent call at a time when many suspect we're in the midsts of a real estate bubble.

Why You Don't Contribute Enough to Your RRSP
Why don't most people save as much as they should? Canadians can contribute up to 18% of their income to their RRSP in exchange for a generous income tax deducation--essentially, free money. Yet most fail to take advantage: In 2003 the median RRSP contributor earned $43,000 but their median RRSP contribution was just $2600, which is only 6%. Overall, only 34% of those eligible to contribute to an RRSP actually did so. When RRSP room left over from previous years is included the result is dismal: Canadians used up barely 9% of the available RRSP contribution room, leaving 91% of it unused. These numbers are astounding--Canadians left an enormous amount of free money on the table! In this article I'll explain the psychology behind why most fail to max out their RRSP contributions, and what you can do to make sure that you do contribute enough to your RRSP.

RRSP's and Income Tax Planning
An RRSP is a tax deferral tool. While most people use their "registered retirement savings plan" to provide income in retirement, your RRSP can also be used just to defer taxes from one year to the next. This article will discuss the tax implications of contributing to, and withdrawing from, your RRSP, as a way of smoothing out your tax rate from one year to the next.

Should You Take the Canadian Securities Course?
Would the Canadian Securities Course help you to become a better self-directed RRSP investor? The CSC is one of the educational requirements for registration with one of Canada's self-regulatory organizations. For example, you're required to take a course like the CSC if you want to work as an investment advisor or mutual fund salesperson. What does this course teach you, and would it be useful for an ordinary investor managing their own RRSP?

Want to Retire on Hans Island?
Do something patriotic with your retirement: Retire on Hans Island! Hans Island is a small uninhabited barren knoll located in the strait that separates Ellesmere Island from Northern Greenland. It's one of the most desolate places in Canada, and it's not really clear why anyone would ever want to live there, but then everyone's different. Canada's claim to sovereignty over Hans Island has recently been challenged, and given how difficult it would be to live on Hans Island, retiring there really would be a heroic act of patriotism.

Foreign Asset Allocation in your RRSP
How much money should you invest in foreign markets? A recent study in the Journal of Finance examined the extent to which mutual fund investors tend to put their money in their home country. This is called domestic bias. In every country, investors are biased towards investing in their own country. In this article we'll look at the market capitalization of global markets, and discuss how much money you should invest overseas. Given that the Federal Govt. just eliminated the foreign content restrictions in RRSP's, it's a good time to review your global asset allocation!

Update: RRSP Reform Receives Royal Assent!
Bill C-43 has received Royal Assent! The old foreign content limits on RRSP's are now officially and legally gone. You can now put as much of your RRSP into foreign securities as you like with no penalty. Thanks to each and every one of you who contacted your MP and demanded passage of Bill C-43. Efficient Market Canada strongly recommends that you increase the US dollar investments in your RRSP and take advantage of the Exchange Traded Funds available on the US stock market.

Trading Shares Over Coffee
The original stock markets evolved from coffee houses where investors would meet and swap paper over coffee. Gradually, as volumes grew, the participants at the coffee tables became agents for others. Eventually, the coffee houses were replaced with full scale trading floors which evolved into the sophisticated web-based trading systems we use today. Well, you can still do it the old way, and I sometimes do. It's a slow, somewhat painful process which instills (in me anyway) a sense of nostalgia and history. Trading shares directly over the table with family and friends can save you a little money (no transaction costs!) and it can be fun.

How much US dollar investment in your RRSP is too much?
A reader recently wrote asking whether the allocation of ETF's I recommended in RRSP Foreign Content Rules Scrapped overweightedinvestment in the United States--wondering in particular if perhaps there is risk that the US dollar might be devalued soon. How much foreign content should you hold in a self-directed RRSP?

Form T1213: Reduce Tax Deducted From Your Pay When You Contribute to an RRSP
Did your RRSP contributions win you a nice tax refund this year? If so you goofed. It's wiser not to overpay your taxes. If you make regular RRSP contributions you can ask to have less tax money deducted from your paycheque each month. Simply file a request to reduce tax deductions at source (T1213) and see a fatter paycheque all year long. The best part is that extra cash will make it easier to hit your 18% RRSP contribution target throughout the year, rather than having to scramble at the last minute. This article explains how to reduce your withheld taxes if you make regular RRSP contributions.

Canadian RRSP Investors: Demand Passage of RRSP/RRIF Legislation
The recent budget proposal to eliminate the RRSP foreign content limit is in trouble: Bill C-43 may die on the order paper. Bill C-43 is the enabling legislation that implements the key budget proposals that every party in the Commons had previously agreed to. This includes the removal of the foreign content restriction on RRSP/RRIFs, as well as the increases in the amount you can contribute tax-free. If the Opposition defeats the Liberal minority government before Bill C-43 becomes law it will be a terrible shame. Whatever your political stripes, please contact the Conservative Party, the Federal NDP party, and (for Quebec residents) the Bloc Quebecois and urge them to pass Bill C-43 before they force another federal election. You might also make some progress by contacting the local riding associations in your area--you can find them on the party websites. No matter who you would vote for you have a direct, financial, real money-in-pocket vested interest in seeing Bill C-43 passed before there is an election.

Exchange Traded Funds: Recommendations
Now that you can own whatever you like in your RRSP the question on everyone's mind is, what? In this article I've briefly summarized the exchange traded funds that I recommend you use to build the foreign portion of your portfolio. The majority of these funds trade on the American stock exchanges.

RRSP Foreign Content Rules Scrapped!
Suddenly I love our Finance Minister. Effective immediately the foreign content restrictions on RRSP's have been eliminated. This is a huge and wondeful change: You can now own as much United States, European, and overseas content as you like in your RRSP. So how much should you buy? This article will take a look at how you should structure your investments under the new rules.

Your RRSP and your Mortgage: Is it a good idea?
Many of you are interested in using your RRSP savings to finance the purchase of your home, either through the Home Buyer's Plan, or by holding the mortgage of your home in your RRSP. This may be a bad idea from an asset allocation standpoint. In this article we'll consider the risks associated with owning a home, and how best to mitigate them.

Your RRSP and Your Mortgage: The Home Buyer's Plan
Should you borrow from your RRSP to buy a home? There are several ways to do this. The simplest is to take advantage of the Home Buyers Plan. In this article we'll look at the mechanics of doing this: Is it a good idea to use RRSP money to finance the purchase of a home?

How Mutual Funds Work: Exchange Traded Funds
This article will explain what an Exchange Traded Fund is, how to use them to manage your own RRSP, and what choices are available. We'll also have a look at the way mutual fund companies get paid so that you can avoid paying too much.Canadian mutual funds are in general a lot more expensive than American funds, and there aren't a lot of different asset classes to choose from. Fortunately there are two points of light: First, American Exchange Traded Funds (ETFs) can be purchased by Canadian investors as foreign content; second, we have a few ETFs of our own here in Canada. Given the absence of good conventional funds in Canada, I highly recommend that you build your portfolio primarily from these ETFs. But beware of trading fees! In this article I will review what an ETF is, take a close look at the fees, compare ETFs and conventional funds, suggest some strategies, and provide you with a list of ETFs you should consider so as to construct an efficient portfolio.

Efficient Asset Allocation: Stocks or Bonds?
One tough nut in investing is the question of asset allocation:how much money should you invest in short-term bonds? How much instocks? There's much debate over this point, but I will do my best togive you some sound advice. You do need to heed this warning, though:there are no guarantees: For every possible investment strategy thereis a future in which it was the wrong choice. First, we will cover the basics and work out the absolute minimum amount you should have in bonds. What's left can go into stocks. Then we will turn our attention to the efficient frontier: the interesting, counter-intuitive property of the market that it is always better to have a mix of stocks and bonds than to have 100% of just one or the other.

Picking Stocks: Avoid What You Know
Many people think that you should only invest in the things you know well. Famously, Peter Lynch wrote in books like One Up On Wall Street that you should be able to pick great stocks by reflecting on things you see in your job and in your daily life. Accordingly, computer programmers tend to invest in software firms, doctors in drug companies, and bankers in financial services, each believing that their expertise in their industry will help them earn an improved return.It sounds like common sense, but it's dead wrong. Investing in what you know is the last thing you want to do. To understand why, we will have to think a little on the nature of risk.

The Birth of Plenty
Another excellent book by William Bernstein: The Birth of Plenty, How the Prosperity of the Modern World was Created.I haven't included this one in the Book Reviews main list because it is not specifically about investing, it's more an economic history of the world. Explores the notion that the four factors which led to modern prosperty were property rights, scientific rationalism, efficient transportation/communication, and advanced capital markets. The fundamental question the book asks is, what happened around 1820, the year that modern economic growth appears to begin? It is not simply a matter of "the industrial revolution", but rather what caused that revolution, and what enabled first Holland, England, and America to translate their advances into sustained progress where previous civilizations failed.

The Globe & Mail Misleads On When To Sell
The Globe & Mail is running a story on when you should sell a mutualfund that has been underperforming:Too patient with your funds? [Globe & Mail; 20 Nov. 2004].The article investigates several funds which have "underperformed" asa way of illustrating how you might analyze your own funds. There areseveral gross errors in this analysis that investors ought to be aware of.This article suggests that investors who "buy and hold forever" aresomehow fools--which may just be an attempt to fool you into churningyour money, earning transaction fees for companies that advertisein the Globe & Mail.

Past Performance of Mutual Funds and Stocks
Will a mutual fund that has been a winner for the last five yearsmore likely be a winner next year? Will the stock of a company thathas been rocketing up for the past few weeks continue its ascent?Will returns in an S&P-500 index ETF over the next twenty years be roughlywhat it has been on average over the last hundred? Absolutely not. Thepast performance of a fund, stock, or even stock market as a whole isno indication of the future return.It's not just some lawyer's disclaimer that you can ignore,"Pastperformance is no indication of future returns" is a fundamentalprinciple of investment. In fact, good past performance is more oftenassociated with poor future returns, for reasons that go to the veryheart of the theory of investment. In this article we'll explore whatyou can learn from looking at historical data, and what you can't. Letthe buyer beware.

Pay Off Your Debts
Most of the time, for most consumers, debt is a bad thing. If you find yourself carrying a balance from month to month, especially if it's credit card debt, you're in a financial crisis. You need to throw up a red flag, go into emergency mode, and pay that sucker off. Towards the end of this article I'll tell you how--but first, a few words about the very nature of debt. When is it a good thing? When is it bad?

Never Sell: Buy and Hold Forever
When should you sell a stock? The answer may surprise you.If you browse the investment literature you are sure to find a lot of advice on when to sell. The news wires buzz with analysts recommendations to buy, hold, or sell an investment, or to underweight or overweight it. Or you'll hear that you should periodically rebalance your portfolio--exchanging growth stocks for values, or blue chips for bonds when the market is up or down, or depending on where interest rates are said to be going, or how confident the Canadian or American consumer is said to feel this month.Is there any merit in the common sense advice to buy low and sell high? How do you know when it's high anyway? And who knows where interest rates are going to go?