Savvy

In due time you will discover that not managing your own money leads to losses more times than gains. Probably sooner than later. In a strong economy, the lack of skills of the so-called “agents” is not so obvious. Yet when the mutual fund they chose for you charges 2.5% MER while losing 12% in value every year, things look clearer.

Don’t beat yourself. It took me more than 5 years to make the step. I thought I didn’t have enough money and thought to myself – what difference can 2-3-4% make on, let’s say, 5000$?! And, oh, my gosh, how difficult it can be to figure all those things out. And then, when I was ready, in 2007, personal things made me lose my focus and I dropped everything again. By January of this year, when I started taking the matter in my own hands, I had 10% less than the money I put in. Not so good for a 6-7 years investment, eh?! Well, that’s life! There is a right time for everything. But I also had the support and encouragement that a very good friend – Sergiu Preston –, a person with a vast life-experience and long track in investing, gave me to start this new enterprise, the act of investing by myself. He pounded on myself all these advantages I describe here, like – I am sure – he did for many other people. I am simply trying to pass-it-forward and to make the path to self-investing much easier.
In any case, when you will be ready to step in this brave new world, the first thing you will do is try to figure out who should keep your money. The comments I make below are mostly focused on Canadian brokerages. In the US, options are much wider, deals are much sweeter and things might be different but the base criteria for selecting a brokerage remains the same. Please also read the fine print and try to understand where you qualify. If you still have unclear things, don’t hesitate to contact the brokers with your questions BEFORE you sign, because later it will cost you a dime and a nickel.

Instead of doing my own research – because I am lazy and lazy is sometimes good – I googled it and I found this excellent breakdown for Canadian brokerage firms: Stingy Investor

As you check the brokerages, you will notice the wide-range variation of fees and commisions. Some are well-established and they are cheap… but only if you do >100 trades/quarter or if you keep +50,000$ in their account. For a beginner, that number of trades is unimaginable. Some charge as much as 29$/trade. Well, if you make 20 trades that is a 600$ – so you really want to pay the brokerage instead of getting that LCD TV for the bedroom?!

Ask yourself a number of questions:

• Will I be trading in USD or other foreign currency?! Why is it important?! Because if the brokerage charges you a currency-conversion commission, you need to take that in consideration. In Canada, traditional, well-established brokerage firms will charge you 1% to change the money in USD, and when you sell the equity/mutual funds, they transform it back automatically in CAD, charging you another 1%, although you might as well desire to purchase something else from NYSE. It has been allowed to keep USD in RRSP (Canadian 401K) since 2006 , yet very few had adjusted their systems to allow such a thing.
• How much will I be charged if I change my mind and want to transfer my funds elsewhere?!
• What kind of customer support they have?! How does their trading platform looks like? How can I access it? Google it and see what other people say but take that with a grain of salt – might represent a particular failure and pretty much all brokerages have their share of bad stories they don’t want us to know.
• What are the perks I can get by signing with them?! Brokerages in US sometimes pay incentives and don’t shun the 100$ you get or 100 free transactions they offer because it is, indeed, free money.
• Do they allow DRIP (Dividend Reinvestment) and if they do, do they allow fractional investment?! (Explanation: If the company X pays you 40$ every month, it is a good idea to reinvest it by purchasing the stock of the company. But if the company is trading at 37$, buying it directly means at least 5$ spent for 1 share. DRIP allows you to have that purchase made without any fees. Fractional DRIP means the brokerage allows purchasing 0.98 units of that same share – some don’t, so if the stock is now 43$, they will place the 40$ in your account)

In short, try to imagine what you want to do, read all the publicity and fine print, tick them off with questions and pick up a firm that will satisfy your PARTICULAR needs.

But enough with the theory. Why did I chose QUESTRADE?!

• low fees. 5$ for up to 499 shares, 0.01/share after that; 9.95$ for mutual funds
• 1% rebate on mutual funds’ MER: but to qualify you need a certain amount (still, I can live without since I purchase funds with MER < 1% anyway)
• 50 free-trades in the first 3 months and 100$ of free trades for every friend you refer (and he/she gets 50$ in free trades in those 3 months)
• keep both USD and CAD in the account; the conversion is 0.5% and once changed the currency stays that way, unless I purchase something in another currency
• while their customer service is less than perfect, and speaks with a funny accent (I have a funny accent too, Eastern European one :), they post good FAQ and I mostly rely on written documentation
  the joining process was simple and documented, most of the steps were done online.

Of course, nothing is perfect:

• now I know that you have to log on 3 websites to see all features: one for Penson (the one that holds registered accounts), one for the main account settings, statements etc. and one for trading) – yet I can live with that.
• Estatements are somewhat late – 10th of each month for the previous one
• the free trading interface (one has options for paid ones – probably much better) is not great but does the trick. Now and then they list things in a way I don’t understand (i.e. USD currency kept in account was listed as a number, like a company).
• While they allow for DRIP, they don’t allow for fractional re-investment.

Yet, I am with them and unless they screw-up badly, I will stay with them because I have no-thrill needs – and I hope that you will not try to become day-traders before you can walk 🙂

Next time I will present some basic strategies for picking up solid AND profitable investments.

WHY DIY?!

There are a thousand reasons to do so but they all pretty much translate in “because nobody care for your money as much as you do”.

The so called “investment agents” are simply “sales agents” and once they make their commission, they will forget about you until next year. You might say to yourself, for good reasons: how am I going to get the knowledge of the markets, or understand all those terms like derivatives, options, beta, EPS, P/E etc. Well, let me tell you the level of knowledge of some of the people you entrust your money with. Before migrating my RRSP investments to Questrade, I asked what fees I will be charged if I wanted to sell them. My agent redirected me to his secretary, being told “I don’t know this kind of thing”. My “agent” didn’t know what are the fees associated with my investments! How much worse can I do?!
My ex went to another agent and asked some trivial questions and made some savvy comments to let her know that she is not completely unaware of investing terms. The investment agent was so enthusiastic that couldn’t help herself ask “Did you ever consider a career as an investment agent?! You seem sooooo knowledgeable”. Otherwise she readily agreed with everything that Brindusa suggested. One would think that you walk into an “expert’s” office to get some insights, not smiling nods.

I will not badmouth a whole profession. I am sure there are good investment agents but, from what I’ve heard, those guys have their hands so full that they mostly focus on big-money and for the smaller investor they are pretty much out of touch. Indeed, you might have an active, REAL investment agent who makes you good money but then stick to him/her and thank God you are so lucky.

It just makes sense that the average investment agent will not necessarily recommend you the best investments but the ones that bring the best commission. A standard mutual fund that very seldom, if ever, beats the index mutual fund (the index of the industry the mutual fund is focused on), would charge you 2.5-3%. And that is yearly coming out of your pockets. A well managed fund, with no load – like Phillips, Hager and North (PH&N), which charge 0.8-1% will not be recommended by agents because the commission is too small. I calculated that the front-loads and back-loads (fees for purchasing a mutual fund: either paid upfront or when you sell them if they are sold before a certain period) cost me with my late agent about 2500$. Those loads are traditionally going into the pockets of the investment agent. Why would they recommend you something that makes YOU money and doesn’t leave much for them?!

I know it seems scary. I heard too the stories with people who lost everything. People asked me if I “play on the stock market”. Oh, God, NO! No such thing, not now and probably not ever. I will NOT play with my hard earned money.
Yet things are not as complicated as the fear of unknown makes them seem. After all, it’s a guessing game and, while nothing is certain, you can make safe, educated guesses as well as the “agent”, just less expensive. The point is not going for the “get rich quick” scheme, because there is no such scheme. For smart ones amongst us a “get rich slow” scheme is good enough and there are plenty of strategies. I never aim at outrageous performances – since most of the time they try to hide huge risks and weaknesses. Even so, one could get 5-7-9% dividend from perfectly sound companies, which reinvested, in time, can make the difference between a comfortable retirement and a stingy one.

Here are some initial steps to take:

• Subscribe to some good newsletters such as (you can tell they are good if they have been for a number of years on the market – if they gave poor advice, they would not have survived long):
• Personal Finance
• High Yield Investing
• and there are many, many more.
Read and understand the basics of investing without bothering too much with the higher level economical knowledge:
• Complete Idiot’s Guide to Investments
• follow the tutorials on Investopidia that will guide you with baby-steps to financial success.
• Use a portfolio simulator, such as this one offered by Investopedia here – where you invest virtual funds and make virtual gains or losses.
• Read what other people have to say, follow the financial news and try to get up-to-date with the global economy. By reading constantly the economy news from your newspaper, you’ll start understanding what industries are making money and which are in a volatile position.

Here are some facts to chew on until part II. Did you know that:

• 300 shares of a stock paying 14% dividend, which you reinvest (DRIP), in 10 years will become 1160 shares?!!!
• by investing 25,000$ in a mutual fund with 0.87% MER (management fees) instead of one with 1.72% MER, with 5% yearly average return, would save you almost 3000$?!!!!
• most of brokeragers in Canada, when you purchase a US equity will charge you 1% currency conversion fee AND, if you sell the equity, they will automatically convert it to CAD, even if you want to purchase another US stock and then charge you another 1%?! Do this thing 2-3 times/year and you doubled the losses that a normal inflation (3%) would bring to your savings.