- "... if you are considering an investment in a mutual fund or ETF, you should understand that you will have little recourse if information provided in the prospectus turns out to be misleading or incomplete, even outright fraudulent" from A license to lie, backdated in Interfluidity.com commenting on the implications of a recent US Supreme Court Case. i.e. we should be very wary of new ETFs; the more complex they are, the more likely something dangerous is being done to investors; with the court case it will be more tempting too for the unethical operators.
- Michael Lewis' non-technical article in Vanity Fair explaining how things went pear-shaped in economic revival poster-child Ireland When Irish Eyes are Crying
- The Onion's satiric piece Visa Exposed as Massive Credit Card Scam ... isn't the best satire that with a good dose of truth? Found this link on The Browser, which has multiple links to a variety of good stuff
- Traditionalist (value investing, Graham philosophy) practically-oriented investment advisor firm Tweedy Browne Company LLC reviews research that reveals "... the importance of dividends, and the association of high dividend yields with attractive investment returns over long measurement periods"
- Who knew the debt crisis could be turned into song?! Have a listen to Split-Rated at Versus by Marcy Shaffer
Sunday, 28 August 2011
Weekend Reading: ETF Danger, Visa a Scam?, Ireland's Woes Explained, Dividends = Low Risk/High Return, Debt Song
Friday, 26 August 2011
Why does it matter? The dividend part of the return - currently running at 2.7% on the TSX according to TMX Money - makes a huge difference over time with compounding. When doing portfolio assessment and benchmarking, whether it's your own, or a financial advisor's, a mutual fund or ETF company's, or a discount broker's, it is deception not to use Total Return for whatever index or asset class is in question.
How are the ETFs? - Amongst ETF providers, iShares and Claymore to their credit explicitly use Total Return indices while with BMO it isn't clearly stated (e.g. neither in the download index spreadsheet nor in the index description for its Dow Jones Canada Titans 60 Index ETF), which in itself is bad.
How about Financial advisors? an example - I don't know how widespread this is amongst financial advisors, and I am only picking on this guy because he happened to be a guest on BNN the other day so I looked up his website, but I was horrified to find that David Baskin Financial's performance against the index in the download blurb clearly uses the price only version of the TSX. How do I know? One of the few places we can access free annual Total Return index data is another financial advisor's website, Norbert Schlenker's Libra Investment Management, in this download spreadsheet. Line up the Baskin and the Libra numbers year by year and see the consistent higher performance of the Libra Total Return numbers e.g. 2010 Baskin TSX 14.4% vs Libra TSX TR 17.6%. Do the compounding of the TR numbers using Stingy Investor's Asset Mixer, who has taken Libra's data and turned it into a handy tool, and the 10-year TSX TR performance up to 2010 is 6.6%. Now the Baskin Financial 6.4% 10-year result doesn't look so good as it did against the blurb's TSX number of 4.2%. (It's also interesting that Baskin's "our team" web info mentions no financial designations but emphasizes TV and public appearances while Schlenker is a CFA, CFP, CIM, FMA and emphasizes his adherence to a code of ethics.)
There's another source of daily updated Total Return data buried within GlobeInvestor. Under Investing > Markets, enter stock symbol TSXT-I for the TSX Total Return Index. It allows one to benchmark year-to-date and one-year TR performance for the TSX on any day. The Libra data is annual year-end only.
Why the limited availability of Total Return data? Perhaps it is just the historical momentum that has seen the price index always being the quoted number, a result of the difficulty in computation in the days before computers and databases (which to my mind explains that widely-cited anachronism, the Dow Jones Industrial Index). Perhaps it is the fact that the TSX sells the data and the Total Return data is the meaningful valuable part while the price index is the loss leader.
Update September 15th - Broker BMOIL confirmed to me (at last, it took about two weeks to get the answer) that their benchmarks which compare against the investor's portfolio do actually use Total returns, not just Price Returns. Good, now I wish they would put a note to that effect on the relevant webpages.
Whatever the reason, ordinary investors need this data. It is time for the financial industry, and the media, to start quoting the right numbers.
Saturday, 20 August 2011
It's time to revisit the question. First, the TFSA now exists. Second, an anonymous comment this past July on the original post suggested the RRSP might be better if one takes into account the possibility that the student can transfer up to $5000 in annual tuition deduction during the time of eventual study, which gives the parent a 15% tax credit (i.e. $750) on the tuition transferred. Excellent question! With interesting results too.
I've built a downloadable spreadsheet (look for the download link on the right hand side of the web page once the spreadsheet opens up as a Google doc in your browser) for readers to play with beyond what I have already done.
Conditions Applied to My Analysis:
- Parent Must Have Enough RRSP Contribution Room - The whole analysis presumes you can put in $2500 per year new money plus up to $2100 reinvesting the tax refund each contribution generates, plus the reinvested refund on the reinvested refund, plus the reinvested refund on the reinvested refund on the reinvested refund etc ... (remember that child's song, there's a hole in the bottom of the sea? this is the tax refund version of it); that's why the RRSP part of the spreadsheet extends way out to the right. At the top Ontario marginal tax rate of 46.41% (see TaxTips.ca's tables for personal tax rates in each Province, which readers can use to check what happens in their own bailiwick) that means needing another $2100 or so of extra annual contribution room. Doing this gives the RRSP option its most favourable conditions.
- Only $2500 in Annual Contributions - This condition is to give the RESP its most favourable conditions, namely that it gets the most free CESG money, so that each contribution buck is getting the most bang.
- Child Must Not Have Enough Income to be Liable for Taxes during Higher Education Years - As I noted in the original post, the RESP's advantage disappears if the student has to pay taxes, even at the lowest tax bracket (see the Student_Taxable tab in the spreadsheet).
Results: (the summary numbers for the discussion below are in the Results tab and the calculation table with inputs you can use to plug in your own numbers is in the RESP_RRSP_TFSA tab; other tabs contain the calculation tables from the original post)
1) RESP is (Almost) Always Best ... if the Child Takes Post-Secondary Higher Education - No matter what the parent's tax rate, the RESP comes out ahead after tax, as shown by the green numbers. The only circumstance when it does not is when, as shown by the red numbers in the Results tab, the parent's tax rate at time of withdrawal is at least three tax brackets lower than at time of contribution - e.g. taxable income goes down from $100k to $70k as in retirement - and the investments earn a low (2%) to medium (5%) annual return. In this latter case, the RRSP wins, but not by much.
2) TFSA Wins if the Child Does Not Attend Higher Education and Parent's Tax Rate Stays the Same - The green numbers under TFSA show that no matter what tax rate the parent is in and regardless of investment returns, the TFSA does better, but not by a lot, than both the RESP and the RRSP.
3) RRSP Wins if Child Does Not Attend Higher Education and Parent's Tax Rate Drops at Withdrawal - The green numbers in the RRSP column show that the RRSP does better and better the more the parent's tax bracket drops between the date of contribution and withdrawal. The higher the investment return, the bigger the effect. When it is three brackets lower and there are high (8%) returns, the net difference is $25,000 more than the RESP and $15,000 more than the TFSA.
- if you are confident that your child will go to college/university before you retire, put that first $2500 into the RESP; if you have several kids, the chances should be higher that at least one of them will go on.
- if you really are not sure your child will go on to higher education , then the RRSP is the better hedging option. The TFSA's advantage when the child does go on isn't big enough to offset the TFSA's lower results compared the RRSP when the child does not go on. Also in the RRPS's favour is that the RRSP's disadvantage compared even to the RESP when the child goes on is much less when investment returns are low and you are in the lower tax brackets.
- if you believe that your income will drop two or more tax brackets by the time the higher education decision will need to be taken, the RRSP looks better even than the RESP. When there is no higher education the RRSP is always superior to the RESP and even when there is higher education, at two brackets lower you are ahead except at high investment returns. If your investments within the education account are cautious and low risk, low to medium returns are what you will get.
Wednesday, 17 August 2011
The innocuously titled Ontario to Change the Way it Collects Estate Administration Tax (Probate Fees) by Clare Sullivan, Aird & Berlis LLP in CCH's August 2011 newsletter describes the additional bureaucracy:
- "... the new provisions require the estate representative to keep records and books of account ... the value of the assets of the estate for probate or administration purposes will have to be supportable ... valuations will be necessary for all property passing under a probated will" >>> i.e. extra effort, time and cost to get formal assessments on everything
- "... The MNR will be able to assess or reassess for a period of four years after the day the tax is payable... The new procedures may also unduly delay the application for a certificate of appointment [my note - this is the document an executor needs to show everyone that he/she is legally entitled to be executor] ... there could be significant delays in obtaining the certificate of appointment and thus delays in administering the estate ... an estate representative may not wish to settle an estate until four years after the application for probate in order to limit his or her personal liability for any unpaid tax" >>> i.e. potential lengthy delays for someone to even getting started as executor. The Catch-22 lunacy of this is that without the certificate of appointment many/most financial institutions will likely refuse to provide any information, which of course can make it impossible to pay the tax and get the certificate. And then there will lengthier delays - goodness knows it takes long enough now - to wrapping up and distributing estates. And even after that, there might be messy reassessments and more to pay later.
One thing is certain - the Ontario Ministry of Revenue will make sure to collect a lot more tax than now (why else would they have done the amendments?), merely from its rigorous and likely painfully painstaking application of the law. Moreover, with the structure in place, down the road one can expect increases in the already highest in Canada rates (see Canadian Tax Resource blog's table). Just wait till the government needs more money and finds that dead people are easier targets than live voters.
It's a done deal. The new law received Royal Assent May 12th. Of course, the government could forget to Proclaim the law, and it would never go into force. Maybe an election would see a new government that would see fit not to take that final step.
Tuesday, 16 August 2011
"OSC has selected for its new Investment Fund Products Advisory Committee: The IFPAC will advise OSC staff on emerging product developments and " innovations " occurring in the investment fund arena and will discuss the impact of these developments [ on investors?], as well as emerging issues. We put forward a candidate, albeit after the deadline We were not aware of the opportunity. Ref. http://www.osc.gov.on.ca/en/
There are many highly knowledgeable non-industry investors around to sit on such committees and provide the retail investor viewpoint but OSC seems to do little bring them into the process. As that famous song phrase goes, when will they ever learn?
Monday, 8 August 2011
Both Portfolios Have Gained - up about 10% to $110,000 or so as of August 5th, though it was higher at the 1-year anniversary since the past few weeks have not been kind to market values. Every single asset class is higher than the value at inception. I note that our hypothetical investor is not panicking and is not / has not sold anything, unlike those mythical investors (why doesn't the press just call them speculators, anyway?) who have been obeying the chicken-little sky-is-falling market forecasting gurus.
Cap-weight Ahead Slightly! - Surprise, surprise, after being behind pretty well the whole year, sometimes by more than $1000, or 1%, the cap-weight portfolio spurted ahead in the last month or so and now leads by about 0.6%. I think the quick shift was the European banks getting hammered in the PXF vs VEU category but need to look further into this. Whatever the reason, this contest doesn't look very conclusive so far.
Rebalancing - After accumulating cash from most of the ETFs for the past year our policy called for review and reinvestment of the cash at each year anniversary. Note: Claymore CRQ ETF has automatic DRIP with distributions so I've tracked the reinvestment for CRQ. BMO also does auto DRIP but when BMO switched to monthly distributions with ZRR and ZRE it has not been worth my bother to do all the tracking of reinvestment for single share purchases, so I've simply tallied up the cash. Not one of the ETFs / asset classes had come near to the forced rebalancing point of 25% deviation from its target allocation in the portfolio. None are off even 10% from allocation target.
Nevertheless, to put the cash to work but not pay too much in commissions to rebalance small amounts, and to keep the asset class by asset class contest going, I've split the reinvestment cash to put another $1000 each into CRQ and it cap-weight rival HXT. The remainder has gone into XBB for each portfolio. These were the two asset classes with largest dollar amount divergence so it works out neatly as a quite realistic action.
More shares of XBB have been purchased (all purchases done at closing market prices of August 5th) because the cap-weight ETFs have paid out more than their fundamental weight counter-parts. That's interesting because the fundamental weight ETF holdings are supposed to be selected and weighted in part according to dividends. However, the higher MER's of the fundamental weight ETFs (about 0.5%) have to be paid. That's a cost performance drag of the real world for the fundamental ETFs that their superior index returns do not reflect. Our contest tests whether the stock performance is strong enough to overcome this impediment.
Fundamental DRW Replaces Cap-Weight RWX in the Fundamental Portfolio - Long ago reader Jordan suggested Wisdom Tree's Global ex-US Real Estate Index ETF (symbol DRW) as a fundamentally-weighted alternative to RWX. Now the switch is done it's done and there can be a contest in that asset class too.
As ever, the two portfolios can be seen side by side at the bottom of this blog page.
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