Friday, February 14, 2020

Short Takes: Stock-Picking, Falling for a Ponzi Scheme, and more

My most recent post was answering an interesting reader question about whether to leave TD e-Series funds for ETFs:

Reader Question: Switching Portfolios

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has some good therapy for investors who trade individual stocks without knowing much about the companies they buy. This is a point I’ve tried to make in the past without much success. During my not very stellar stock-picking period I pored over financial filings trying to understand the businesses I wanted to own. But it wasn’t enough to compete with other traders effectively.

Andrew Hallam explains how he fell for a Ponzi scheme.

Retire Happy explains when you shouldn’t contribute to an RRSP.

Friday, February 7, 2020

Reader Question: Switching Portfolios

A reader, Doug, asked the following interesting (lightly-edited) question about whether it’s time to switch portfolios:

I currently have over $200K in my RRSP sitting in TD e-series mutual funds (25% bonds, 25% each in CDN/US/Int'l Equity). The resulting MER is 0.37%.

Does it now make sense for me to switch over to ETFs? I was thinking another Canadian Couch Potato portfolio with the ETFs VAB and VEQT. The MER is around 0.22%, a savings of $300 per year. However, I'm very comfortable with e-series funds as I've been using them for 6 years.

With ETFs, I also have to pay commissions to buy which will amount to perhaps $120 to $240 per year as I purchase twice a month.

What are your thoughts? Any other pros and cons that you can think of? Does it make sense to switch given the saying that perfection is the enemy of good?

First of all, Doug, congratulations on amassing over $200k in savings over 6 years. You’ve given yourself more choices in life.

Your last question is an important one. No matter what your portfolio looks like, there will be some change you could that would seem to improve it. Some investors take the obsession for perfection too far.

There is nothing wrong with sticking to your TD e-series funds. You’ve obviously built a steady saving habit using these funds that is working for you. Even if your portfolio were 10 times larger, paying an extra $3000 per year (or $250 per month) is certainly tolerable, particularly when you have $2 million in invested assets.

But I understand the desire to cut costs. This is a choice I’ve made myself. You’re right that commissions could take a bite out of any MER savings. One solution would be to get an account that doesn’t charge commissions on ETF purchases. Another would be to allow cash to build up somewhat and trade less frequently.

Consider these potential changes carefully, though. Are you going to continue saving as well as you have been with this disruption to your current habits? Only you can answer this question.

I can see a number of sensible ways forward. One is to make the change all at once. Another is to open a new trading account and direct new savings to this account for a while before sending all your TD e-series assets to the new account. Or you could defer the decision about making this change for a few years when your portfolio is larger. Finally, you could decide to stick with e-series indefinitely.

If your current costs were much higher, I would say they will ultimately affect your life negatively. However, the differences among these approaches are fairly small compared to the big things in life like health, family, and friends.

Friday, January 31, 2020

Short Takes: Better Mutual Funds, Model Portfolios, and more

Here are my posts for the past two weeks:

Mutual Fund Costs not in the Spotlight

My Investment Return for 2019

TD to Start Charging More Interest on Credit Cards

Here are some short takes and some weekend reading:

Jon Chevreau profiles several mutual fund companies offering much better choices than the typical expensive Canadian fund.

Canadian Couch Potato makes some changes to his model portfolios.  The biggest change for the better is dropping Tangerine funds.  They’ve always been just too expensive.

The Blunt Bean Counter tackles the difficult subject of whether to pay for a child’s wedding.  A good starting point is to control the cost of the wedding no matter who pays for it.

Preet Banerjee interviews Justwealth CEO Andrew Kirkland.  If you have questions about Justwealth’s offerings, there’s a good chance Preet asked it in this interview.

Thursday, January 30, 2020

TD to Start Charging More Interest on Credit Cards

Recent reports that TD will start charging compound interest on all personal credit cards are only partially true.  TD was charging some compound interest on these credit cards and will start charging more.

The relevant section of the credit card agreement used to read as follows:

If interest is charged, it is calculated on the average daily balance of each Transaction from the transaction date until that amount is paid in full.  The total is the amount of interest we will charge you on each statement on the last day of your statement period.

The new agreement replaces the last sentence with the following:

We add your unpaid interest charge to your balance at the end of each statement period.  As a result, we charge interest on unpaid interest.

The difference is in the time from the end of a statement period until the due date for your payment.  During this time on certain personal credit cards, TD is now charging daily interest on the newly accumulated interest instead of giving you a few weeks interest-free to pay this interest.  Keep in mind that if you haven’t paid your balance in full, they’ve always charged daily interest on the rest of your balance during the time from the statement end to the payment date. It’s just the newly accumulated interest that is treated differently.

So, what does all this mean for the amount of interest TD charges?  On the surface, it seems like a change from simple interest to compound interest, but this isn’t right.  Under the old rules, there is compounding of interest upon interest with a delay. This may not seem right if you pay off the interest each month, but it’s still compound interest.  If it were truly simple interest, you could wait until the end of the year to pay all the interest without any additional interest being charged.

I’ll leave the details to the end of this post for the few who may be interested, but if a credit card charges a nominal interest rate of 20%, the compounded interest rate under TD’s old rules is 21.59%.  The calculation is simpler under the new rules because the full debt pays interest every day and gets compounded monthly. So, we take one-twelfth of 20% and compound it 12 times to get 21.94%.

So, we see that TD was already getting most of the compounding before they changed the rules, and now they get all of it.  We might wonder why they would bother making this change for so little benefit. Big banks are under pressure to keep their dividend payments growing, and they won’t leave any stone unturned in their search for higher profits.

The Gory Math Details

Let r be the monthly nominal interest rate: r=20%/12.  Let t be the fraction of a month delay from the end of a statement period to the payment date.  On one of my credit cards, this is 3 days short of one month: t=1-3/(365/12). If TD’s delay is different, it will make a small difference to this calculation.

Let x be the rate of increase of a credit card debt from one payment date to the next.  This is the quantity we want to calculate. So, without any intervening payments, the debt in 3 successive months is M, M(1+x), M(1+x)(1+x).

The interest in the last month is M(1+x)(1+x)-M(1+x)=Mx(1+x).  We can also calculate this last month’s interest a different way.  Before the payment date, interest accumulates on a debt of M for a total of Mrt.  After the payment date, interest accumulates on M(1+x) for a total of M(1+x)r(1-t).

Equating the two interest totals gives the quadratic equation xx+(1-r+rt)x-r=0.  We can solve this for x and then calculate the compounded annual interest rate (1+x)^(12)-1.  For the numbers in our example, this works out to 21.59%.

After TD’s rule change, the compounded interest rate is (1+r)^(12)-1=21.94%.

Tuesday, January 21, 2020

My Investment Return for 2019

In 2019, my investment return was 15.8%. This sounds good in isolation, but withers when we consider that U.S. stocks were up over 30%. So, is my investment approach a failure? Hardly, as I’ll explain.

To begin with, when you diversify, you’ll always have some part of your portfolio that performs better than other parts. Because I can’t predict which investment will work out best in a given year, I’m best off diversifying.

So, why did my return trail U.S. stock returns by so much? There were many factors. One is that I measure my returns in Canadian dollars. Because the Canadian dollar rose in 2019, U.S. stocks rose by less than 30% when measured in Canadian dollars.

Another factor that reduced my return was that other asset classes didn’t perform as well as U.S. stock indexes. Canadian and foreign stocks didn’t do as well, and I have a small cap value tilt that didn’t do as well.

Another drag on my returns comes from the fact that I’m retired and keep 5 years of spending in fixed income, including high-interest savings accounts, GICs, and short-term Canadian government bonds. This is nearly 20% of my portfolio, and it makes less than 3% interest.

All these factors apply equally well to my computed benchmark. But a final factor is that I had some bad luck in the timing of adding new money to my portfolio. This new money near mid-year missed the runup in stock prices over the first 4 months of the year. I use time-weighted returns for my benchmark, so this year my portfolio’s internal rate of return (IRR) trailed the benchmark by about 0.6%.

The following chart shows my cumulative 25-year investment results in “real” terms, which means after reducing the returns by the amount of inflation.



So, each dollar that has stayed in my portfolio for the full 25 years has increased in buying power by more than a factor of 7. That’s about double the rise in my benchmark, mainly because I had an unbelievably lucky year in 1999.

I have no idea what 2020 will bring, but I’m not counting on another year of double-digit returns. I’ll remain diversified and maintain my cash buffer to live on.