History of financial institution failures in Canada | General financial discussion | Discussion forum

Bill said

Ontario is broker by the day. Where would the money come from to bail out Ontario credit unions?

+1, Bill.

(And, hence, why I am suggesting one needs to look beyond simple "deposit insurance" parameters such as supposed provincial government "guarantees", as SD2013 would have us all do, and look to things like the credit ratings and capitalization of the issuer making that insurance 'promise' - or even the guarantor making the "guarantee" of the insurer's 'promise'.)

Cheers,
Doug

Bill said
Ontario is broker by the day. Where would the money come from to bail out Ontario credit unions?

Ontario's financial shape doesn't really matter. Deposit insurance for and regulaton of Ontario credit unions is provided by the Deposit Insurance Corporation of Ontario (DICO) and not the Ontario government itself.

DICO has a Deposit Insurance Reserve Fund for covering any losses on insured deposits. According to DICO's 2012 annual report, the fund had $147.5 million at the end of 2012, which represents 0.64% of total insured deposits.

Loonie said
What I'd really like right now is something that would protect us from the downward spiral of the Cdn dollar! We could have all done much better the last couple of months if we'd moved to US dollars, and the future doesn't look much better in the shorter term at least. I must admit, the risk of always being in Cdn currency does scare me.

The loonie depreciates because Canada's productivity is less than the competition and thus trade imbalances. Often it is the health of the commodity industry that affects us most because that is what most of our trade is. No one, especially Canadians with a tiny economy relative to the rest of the developed world, should have all their assets in "Canada". With our economic health tied so closely to the US, I'd suggest we should have as much in the USA as in Canada (or perhaps as much in USA and Europe combined as Canada). That is easy to accomplish via unhedged broad based equity ETFs or index mutual funds.

There is no exchange if one holds US dollars and uses those to buy US$ based investments. I have allocated a certain percentage of my portfolio to US$ based investments and RBC Direct Investing creates a US$ account or every Cdn$ account held. When I wanted to buy some FDX last year I sold V to get the funds needed.

In the latest issue of Moneysense magazine (April 2014) Dan Bortolotti has an article titled "Time to step back from the hedge" where he suggests it is better to hold foreign equity ETFs and Index Funds without currency hedging. Thus, one would buy IVV in US$ rather than XSP in Cdn$ with currency hedging. From the article: "Since 2005, however, XSP lagged IVV by an average of 1.6 percentage points a year, largely due to inaccurate hedging (it's reset only once per month)."

I started looking at my XSP holdings and did a lot of work last night on what happens if one replaces XSP with IVV and due to the large difference in share price I found the reinvestment risk is greater with IVV. I wrote Dan a longish email and now am waiting to hear back from him.

GS

Loonie said

Greg, I am interested in what you are saying but am mystified by the language. [snip]

Loonie:

We all started at zero knowledge. I have done a ton of reading and so consider myself relatively "self taught", but only know what I know. Never be afraid to ask me questions!

XSP and IVV are ETFs run by Blackrock Investments under their iShares brand. XSP is called iShares S&P 500 Index Fund (CAD-Hedged) and IVV is called iShares Core S&P 500 ETF.

XSP holds one investment which is IVV. Blackrock do "some magic" (which I have never bothered to try to understand) to hedge the fund back to Canadian dollars so currency fluctuations do not affect the performance - "much". The "much" is what Dan Bartolotti was writing about.

XSP is purchased in Cdn$.

IVV holds US S&P500 stocks and from my RBC DI site: "The investment seeks to track the investment results of an index composed of large-capitalization U.S. equities. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It seeks to track the investment results of the S&P 500 (the "underlying index"), which measures the performance of the large-capitalization sector of the U.S. equity market."

It's top ten holdings are

Apple Inc 2.83%
Exxon Mobil Corporation 2.52%
Google, Inc. Class A 2.04%
Microsoft Corporation 1.74%
Johnson & Johnson 1.55%
General Electric Co 1.54%
Wells Fargo & Co 1.33%
Chevron Corp 1.33%
JPMorgan Chase & Co 1.28%
Procter & Gamble Co 1.28%

and the list goes on for pages and tails out at

BEAM INC 0.08%
CAMERON INTL CORP 0.08%
LOEWS CORP 0.08%
FIRSTENERGY CORP 0.08%

IVV is purchased in US$.

My XSP holdings happen to be in my RSP but that is just because of my asset allocation and my wanting to hold Cdn dividend paying investments in my trading account which forced much of my non-Cdn equity holdings into the RSP. I also hold all my fixed income stuff in my RSP and now in my TFSA due to poorer tax treatment of those classes of investments.

One could purchase any of XSP or IVV in a registered or non registered account. There are also tax implications with holding them in a registered account in that while gains are not taxed (till removed from an RSP) neither are losses eligible for off-setting other gains. If one held any equity in a TFSA and it went down below ones ACB (adjusted cost base) one loses that TFSA room if the equity is removed. Simply stated, put $1000 in a TFSA, buy any stock with that $1000. Have it drop to $500 and sell it. You don't have $500 of capital losses to offset other capital gains and if you sell the stock and remove the $500 you cannot later recontribute $1000 but only $500. My TFSA is for long term holdings and so I don't worry about that. Young'uns might!

Reinvestment risk - really applies to bonds and is the risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. My use of the term may well be wrong but what I was alluding to was if I own an equity and it pays a dividend. If the share price is, say $20 and my dividend is $81 my RBC account automatically reinvests the $81 to buy 4 more shares but cannot buy fractional shares so pays the $1 out in cash. If the
share price is $42 my RBC account automatically reinvests the $81 to buy 1 more share but cannot buy fractional shares so pays the $41 out in cash. There is a much bigger downside to frittering away the $41 than there is to frittering away the $1.

For the analysis I was doing after reading the Moneysense article I used CDN$55000 and 10% US exchange (or US$50000) to work the numbers for simplicity. After a ten year period, assuming no change in share price or exchange rate and ignoring income taxes, (just to analyse the dividend payout and reinvestment of those dividends) the Cdn XSP account had roughly $200 from dividends left over and the US IVV account had roughly $3000 from dividends left over. This was solely because the price of XSP was in the $20 range and IVV was in the $175 range and the dividends were not getting more fully reinvested. Those IVV sums, being paid quarterly, ran the risk of simply being frittered away.

Hope this helps.

Keep asking about what you don't understand so you can understand it.

Greg

Loonie:

I could try to explain currency hedging, but it has been done before. One quick source is this blog post by Dan Bortolotti writing in Canadian Couch Potato about currency hedging in International Funds. Another writeup is by RBC Global Asset Management and is found here.

The differentiation I was trying to make about TFSA and RSP accounts was that once money comes out of an RSP it is out while TFSA money coming out creates re-contribution room. $1000 ithat turns into $500 and comes out can only go back in as $500 so the equity loss of $500 also is a loss of TFSA room.

Currency will either stay the same, appreciate or depreciate. Appeciation or depreciation is going to affect your returns even if the securities don't change value one bit.

As to trying it out with a small bit of money -- I would rather see you have a plan for what you want to do. I backed into my portfolio's current structure. I had a slew of investments that were seemingly unrelated. I decided I wanted to get out of Mutual Funds of any type, as I was reading too many articles about 2.5% MER fees. I decided to sell mutual funds and buy ETFs. I also decided to buy bonds rather than bond funds as my portfolio was now big enough to support individual bonds, then decided I wanted strip bonds. BUT, before I made changes I had to get my asset allocation RIGHT for ME. I read and read and read. I found sample portfolios on my RBC DI site and looked at Quicken's recommended portfolios for my risk profile and read about other sample portfolio mixes for what seemed to be my risk profile. Finally, I set my asset allocation, after reading that it will never be 100% right. (Analysis paralysis -- see below!)

I then bought and sold till I got to the asset allocation mix that I had chosen. Now, each January I review my asset allocation and sell and buy to get back to it.

You need to understand your own risk profile. The you need to set your asset allocations. Then, and only then, should you be buying or selling -- because then you will be buying or selling to get to an allocation that your risk profile will be happy with.

When I was getting there I found myself way over weight in Emerging Market Equities and started thinking about it one night while trying to get to sleep, and couldn't get to sleep. The next morning I dumped some of the Emerging Equities and bought something I considered a little safer. That night I had no trouble getting to sleep.

~~~~~~

I read another excellent article in the latest issue of Moneysense called: Train Your Investor Brain". And, I just discovered it is also written by Dan Bortolotti. In it he talks about Overconfidence, Analysis paralysis, Framing, Mental Accounting, Recency Bias, Illusion of Control and Action Bias.

Framing is buying $1000 of something and having it go to $500, but not selling it as yuo are waiting for it to go back to $1000. It dropped 50% but needs to go up 100% to get back to where you bought it.

Framing is also when your advisor reviews your $200,000 portfolio and tells you he can manage it for 1%. Sounds Ok, till you realize that is $2000 per year. Your advisor would likely not quote the $2000 number.

Analysis paralysis is when you have three choices, say chocolate, vanilla and strawberry, it is easy to make a choice, but with a 150 flavour selection, you don't choose anything as you might be "wrong".

Keep asking questions!

Greg

Loonie:

Back to my reading -- Canadian Moneysaver March/April 2014 issue has an interesting piece on picking a Money Manager. It suddenly hit me that folks with "lots of money" have a Financial Planner (who advises them on investments) and a Money Manager (who actually manages the money involved in the plan).

Most of those of us with "advisors" use the same person as Money Manager and Financial Planner.

Now, about getting your feet wet. If you are particularly risk adverse, you likely want a very conservative asset allocation. Here is some initial reading.

I strongly advise against trying to pick a stock, as my experience is the one I would pick is usually the one that goes down when others are going up. I do like ETFs that try to mimic the broad market. That market, however, does go down from time to time, and so do ETFs. Peoples worst moves are to decide to get their feet wet, buy something, have it go down, sell it at a loss, and convince themselves that the market is not for them.

My portfolio is very roughly 5% cash, 45% Canadian bonds, 25% Canadian equities, 13% US equities, 10% EAFE equities (Europe, Australaisa and Far East) and 2% Emerging Markets (BRICS - broadly Brazil, Russia, India, China and South Africa). My bond holdings are heavily weighted towards Strip Bonds and those have a fixed payout at their maturity. So, assuming the underlying companies/governments don't default, my money is "safe". The lesser weighted Bond funds can and will drop in value if interest rates go up. In the meantime I am getting interest payments from them. The 50% that is equities can suffer significant drops. My feeling is that if the world market drop 20% I am down 10% and a 50% drop leaves me down 25%.

My asset allocation works for me. Yours needs to work for you. You also need to frame it -- my telling you I hold 45% Canadian bonds doesn't tell you if I have $100,000 or $10,000,000 in Canadian bonds. My telling you a 20% market drop will leave me down 10% needs to be turned into dollar values to have meaning as a 10% drop to a $100,000 portfolio is $10,000 whereas a 10% drop to a $2,000,000 portfolio is $200,000 and some folks may be more comfortable with one of those numbers than the other.

My RBC Direct Investing platform allows one to construct practice accounts where one can invest practice money to buy real stocks to watch what happens. However, all this takes time.

Greg