A Canadian going to self-directed investing

Question:

I want to move my poorer performing US stocks into a US index exchange-traded fund (ETF), most likely IVV. I see it has jumped over the last couple of days, but I’m going to wait to see what happens with some of the US news.

I’m also meeting my financial advisor next week. I’ve already told him that I’m going to transfer my US stock to my itTrade (self-managed) account.
I haven’t touched any of my CDN stocks yet. I don’t want to convert any of these funds to US. You had mentioned some CDN funded ETF’s that follow the US market. Would they be a smart choice? I’m assessing my portfolio. I have some stock picks that have done well since buying. I’m not going to move on them unless there is reason to believe they will have limited future growth.
I could use some advice on how to simplify my portfolio. As mentioned, my financial advisor had purchased many stocks in the hopes of the better ones would make up for the poorer performing ones. I’d really like to get down to a few good stocks and ETFs that I don’t have to be constantly managing.
Thanks again for your help.

Monday Morning Millionaire Program Answer:

IVV is an excellent example of a US index exchange-traded fund. Note, however, that habit number four of highly effective investors is to buy and hold. That is, they don’t attempt to time markets. Waiting to see what happens with some US news is trying to time markets. The Monday Morning Millionaire Program recommends that you just go ahead and make the switch anytime now and do so with all your stocks not just the poorly performing ones. Habit number three is buy the US market as a whole, that is, do not pick stocks.

Tell your financial adviser that you would like to hire him on an hourly basis once in a while, to review what you are doing. Over the course of a decade, more than 90% of advisers are unable to equal the simple act of buying and holding an exchange-traded fund which mirrors the S&P 500. Tell your advisor that you have joined the Monday Morning Millionaire Program and that I show my personal portfolios every Tuesday. Tell him to consider joining.

I have not communicated with a financial advisor for over two decades, now.

Concerning Canadian stocks, collectively, they have gone exactly nowhere over the last decade. The US market has risen about 400% during the same period.

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Which ETF is best to track the S&P 500?

On January 21, 2019, from John G…..

Question:

Are you suggesting to invest in all 3 ETF’s (SPY, VOO, IVV) equally or choose one? Thanks again!

Monday Morning Millionaire Program Answer:

These three ETF’s are not different in any significant way. They give investors the same low-cost exposure to the 500 largest companies in the United States. SPY fees are at 0.09% and VOO and IVV are at 0.04%. Since they are listed in the US they need to be purchased in US dollars. There are no benefits in purchasing more than one these.

VSP, XSP and ZSP are Canadian dollar versions of ETFs which track the S&P 500. There are no option contracts available for XSP and ZSP while VSP has very low option trading activity. If you are interested in writing puts and calls in your fun portfolio, SPY, VOO and IVV are a better choice.

Remember, write puts and calls in your fun portfolio only. Over the course market cycle, investors cannot lose money writing puts and calls but most would be ahead simply holding any of the above ETFs in their core portfolio.

 

 

 

Questions about moving securities into US ETFs

Question:

I have approximately 1/3 of my investments in US and 2/3 in CAD. I’m going to start transferring funds from my financial adviser to my iTrade portfolio, starting with my US stock. I have some questions:

1. Should I transfer my stocks in kind? That way, I can pick and choose which ones I sell and re-invest in ETF.
2. Which Canadian and US ETF’s should I be looking at? A good portion of my portfolio is dividend based.
3. Should I sell only small blocks of stock to purchase the ETFs? There are several stocks that I would take a loss on and they are in my RRSP.

Monday Morning Millionaire Program Answer:

Since you are new to the Monday Morning Millionaire Program, if you read or re-read HABITS OF HIGHLY EFFECTIVE INVESTORS, you will understand the reasoning behind our answers

Eliminating foreign content restrictions in registered portfolios was one of the greatest gifts Canadian investors have had from their government. Since the crash of 2008/2009, the Canadian market has gone exactly nowhere. During the same period, the S&P 500 has risen an incredible 400% until the reversal of late 2018!

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Percentage portfolio movement which signals time to rebalance

Question:

I was on a McGill Advisory webinar recently, (topic investing) and they had nothing bad to say about passive investing and managing your own portfolio.  They did surprise me with two things that I would like your feedback on:

1. They rebalance at 25% increase or 10% decrease. Not sure why the 25% up before they move but wanted your thoughts on this.

2. They manage many clients so they use the S&P500 market level to determine the percentage up or down rather than looking at the individual portfolio performance. This sounds simple rather than looking at various accounts so what do you see as the downside here?

Monday Morning Millionaire Program Answer:

Rebalancing to your personal asset allocation, say 50/50, is a technique to manage risk. Through the course of a market cycle, that is, peak to trough to peak  (4 to 5 years), a 50/50 portfolio  will roughly equal the S&P 500 performance with half the risk, namely half the volatility. The percentage of portfolio movement which signals the time to rebalance is arbitrary. Using a smaller percentage decrease to signal buying will result in more frequent purchases of smaller bargains. Using a larger percentage increase to signal selling will result in taking profits at a higher level.

The subject merits a closer look and we deal with it in our January 21 blog.

To answer your second question, the major downside is that many client portfolios seem to be actively managed. Based on the evidence as reported in the academic financial literature, the Monday Morning Millionaire Program philosophy recommends that core portfolios should mirror the S&P 500 through the use of the appropriate exchange-traded fund and be left alone. That is, they should be passively managed. Evidence shows that any other portfolio makeup is virtually certain to underperform. Consistent, long-term outperformance is possible but rare.

Using the S&P 500 market level to measure the percentage, fully makes sense since all but the most poorly constructed portfolios will move in tandem.

 

 

 

 

A question about rebalancing

Question:

If the asset allocation is 50:50 and there is a 10% correction, then the allocation would become 45:55… so then, I would re-balance to 50:50 by purchasing the US broad market ETF. Is that correct?

Monday Morning Millionaire Program Answer:

Exactly. And going in the opposite direction, if the US broad market ETF rises 10%, then the allocation would become 55:45. When that happens, you should re-balance by selling enough of your ETF to bring the asset allocation back to 50:50.

 

The fun portfolio, volatility, derivatives

Question:

With the recent market volatility, how are you trading with the derivative market? Are you still trading the same number of contracts every Monday morning now as you were when the volatility was much less sporadic?  Thank you

Monday Morning Millionaire Program Answer:

You are right in doing your options selling in your fun portfolio and not in your core portfolio. Most of the time selling derivatives is a winning strategy, but not all the time. Over the course of a decade, investors are more likely to come out ahead by maintaining their asset allocation between an exchange-traded fund which mirrors the S&P 500 (e.g.,  SPY, VOO, IVV) and cash. Mine is 50/50. Remember,  only sell, never buy or trade derivatives. Review Chapter 8 of Monday Morning Millionaire.

Increased volatility increases premium values; it can be more interesting. So yes, I sell the same number of contracts when the markets are more volatile.

 

 

 

 

 

Do the index exchange-traded funds (ETFs) offer DRIP’s?

Question:

Do the index ETF’s offer DRIPs? It seems to me that this would be an ideal program for a “DIY” investor.

As a Canadian, we could augment your program (which doesn’t need augmentation!) with DRIP’s set up directly with certain sectors; e.g.  BCE, IPL, TD, FTS, SU.

This is a classic “do nothing” program that also takes advantage of compounding, company discounts on share purchases and no commission fees.

Your comments would be appreciated.

Monday Morning Millionaire Program Answer:

Some ETFs offer DRIPs and some don’t. You can choose a DRIP plan for any stock or ETF held in an account with Fidelity Investments and Fidelity will buy shares and allocate them to DRIP shareholders (without a commission). Most other larger brokerage firms will do the same.

The Monday Morning Millionaire Program recommends rebalancing to your personal asset allocation whenever that ratio changes by 10% or so. Any excess cash, be it from dividends or a drop in ETFs value should be used to rebalance to your asset allocation. There is no need to pay attention to DRIPs.

 

Could I do better with an actively managed portfolio?

Question:

I am a 71-year-old dentist and plan to retire in three years or less. I currently have $2 million with Fisher investments and $3 million with Vanguard investments. I’m not pleased with the Vanguard performance since they did not equal the market, so I took my money out and put it in with Fisher thinking that I need someone to manage the account actively. I would appreciate your opinion.

Monday Morning Millionaire Program Answer:

First, congratulations on saving $5 million. You can live very nicely on that amount in retirement without depleting the principal. (See below.) In fact, you can likely grow it and leave an inheritance for your family and a gift to charity.

Writing in Forbes, Ken Fisher himself stated: “My 2014 stock picks lagged badly. Equal money invested in each, upon publication, less a 1% commission haircut, did four percentage points worse than the same money plunked into the S&P 500 (with no haircut).”

Below, you can see the to-date, six-year performance record of the S&P 500, Fisher Asset Management LLC and the average hedge fund portfolio. Finance academics and scholars fully expect this result.

Fisher Asset Management LLC outperformed the average hedge fund. However, as expected by financial scholars and academics, the company could not equal the S&P 500. The number of active managers who beat the S&P 500 over the long term is much closer to 0% than it is to 10%.

As we stated in our answer to journalist D. B.’s question “Can buying a hot stock make an investor money?”, in April 2000, Barber and Odean published a paper tracking over 66,000 accounts (that is not a misprint) over a five-year period. Active investors earned an annual return of 11.4 percent. Passive investors gained over 17 percent during the same period. Many other studies show similar outcomes.

Equalling the S&P 500 is as easy and straightforward as it is nearly impossible to beat over the long term. The reason that so few professionals equal the S&P 500 is the need to subtract management costs from the performance. Over an investing lifetime, that cost easily adds up to a year’s income for investors. The Monday Morning Millionaire Program shows how to be a self-directed investor and keep that money.

For most retired people, the best choice for long-term investing is to do nothing else but to hold an exchange-traded fund (ETF) which tracks the S&P 500 and do so within the bounds of a personal asset allocation regime. This increasingly popular approach is called passive investing. Examples of ETFs which follow the S&P 500 are the S&P 500 ETF (symbol SPY), Vanguard S&P 500 (VOO), and the iShares S&P 500 (IVV). Each is an excellent approximation of the U.S. economy, the most robust economy in history.
Some of your money is likely held in tax-advantaged portfolios while some of it probably is not. Moving money from one account to another could result in a tax hit. Consult with your accountant about this.

Regarding your Vanguard experience, the company has over 200 funds of various sorts. What we stated above, applies to them as well.

Vanguard founder John Bogle, greatly admired in the investment community, originated the idea of doing nothing else but holding an exchange-traded fund (ETF) which tracks the S&P 500 and doing so within the bounds of a personal asset allocation regime. In his will, Warren Buffett himself wants to have his estate managed precisely that way. That should be good enough for any of us.

Let us take a look at the details of your situation. You could comfortably retire right now.

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Can buying a hot stock make an investor money?

Question:

I know that the Monday Morning Millionaire Program recommends acquiring the whole U.S. market by buying an index exchange-traded fund (ETF) which tracks the S&P 500 and not picking stocks. Surely, there must be exceptions to this when some sector is unusually hot such as the cannabis stocks recently.

I was reading up on the whole cannabis situation, so I bought some Canopy Growth Corp. (Symbol CGC) at $32. It fluctuated wildly over the next few months soaring to over $50 and then down to $28. I hung on.

Finally, on October 15th it reached $71.60, and I sold it. It went up to over $75 that same day and then dropped to $68 a day or two later.

Is it not possible to repeat that sort of result when some sector is hot?

Monday Morning Millionaire Program Answer:

You are an active investor. The dark green line in the chart below shows what CGC did last year.

Savers buying an index exchange-traded fund (ETF) which tracks the S&P 500 are passive investors. The red line shows SPY, an index ETF  tracking the S&P 500 during the same period. By comparison to CGC it looks pretty tame, does it not? You doubled your money in one month buying CGC while SPY slept.

In April 2000, Barber and Odean published a paper tracking over 66,000 accounts (that is not a misprint) over a five-year period. Active investors earned an annual return of 11.4 percent. Passive investors gained over 17 percent during the same period. Many other studies show similar outcomes.

Have fun investing actively but to do so in a “fun” portfolio. Be a passive investor in your core portfolio.

My personal “fun” portfolio makes up about 5% of my total market assets. Regardless of how it fluctuates, it will never have a major impact on my holdings. No one needs a “fun” portfolio.

On November 20, yesterday, we published The Speculation Blues, a charming poem by Mark T. Hebner with a link to a related video. It talks about active and passive investing.

You will enjoy it.

 

 

 

 

A question about moving stocks from one account to another

Question:

You frequently state that, based on the last decade, a U.S. market index Exchange-Traded Fund (ETF) which tracks the S&P 500, held in a tax-advantaged account, has been the investor’s best way for growing savings and is likely to remain so for many years. I have some dividend-paying stocks that I inherited from my mother.  They are in a tax-advantaged account which has accumulated some cash as a result. What is the best way to convert these and the cash into an exchange-traded fund which tracks the S&P 500?

Monday Morning Millionaire Program Answer:

You are correct in noting the benefits of investing in a U.S. market index Exchange-Traded Fund (ETF) which tracks the S&P 500.  It is as easy to match (minus a small transaction cost) as it is difficult to beat. There are several other ways of getting decent income from the stock market and a portfolio of dividend-paying stocks can be excellent.

The tax implications of changing your holdings within the present tax-advantaged account or moving   into an exchange-traded fund which tracks the S&P 500 might cost you more than the benefits of so doing. Consult with a fee-only financial advisor and not a fee-based advisor. A fee-only advisor has no conflict of interest. A fee-based advisor charges commissions as well as fees. The temptation to put savers into investments which generate higher incomes for the advisor is frequently difficult to resist.