The big news out of Ottawa this week saw the federal government taking steps to cool the housing market by introducing a financial stress test to all insured mortgages and closing a tax loophole for foreign real estate buyers.
Starting October 17th all home buyers must qualify at the bank’s posted rate, or the Bank of Canada’s posted rate (currently 4.64%), whichever is higher. This so-called stress test already applies to variable rate mortgages or mortgages with terms of less than five years.
First-time home buyers are expected to feel the biggest impact from these new mortgage rules as it will affect the maximum amount they can afford to spend on a home. Canadians with existing mortgages will not be affected by these changes when it comes time to renew their term.
Has Ottawa brought this country’s housing fantasy to its knees?
This Week’s Recap:
On Monday I wrote about making rational vs. behavioural driven financial decisions.
On Wednesday Marie explained why she has been a dividend investor since the early 1990s.
And on Friday I reviewed Scotia iTRADE U and its educational tools for self-directed investors.
Weekend Reading:
Rob Carrick has been touring college campuses in eastern Canada and found today’s youth to be slightly obsessed with their credit scores. Carrick says if you’re obsessive about your credit score, you’ve got it all wrong.
Jeff Rose says your new car payment is the one monthly payment that’s killing your wealth.
Mark Seed explains how to save (and splurge) on your family vacation.
Dear younger me: What money advice would you give to your younger self?
Tangerine is giving away a free copy of David Chilton’s The Wealthy Barber Returns eBook.
Kerry Taylor is On The Money with CBC and here she explains how to plan ahead and save for your child’s education:
Preet Banerjee explains the difference between three types of RESPs; the individual and family plans you can get from your bank or credit union, and the group plans sold by scholarship dealers.
Lessons from the Dragons: A look at how online comparison site RateHub attracted a flurry of offers from the Dragons. Here’s another take on why RateHub turned down $1M for a 7% stake in its business.
Is the latte factor really making people poor? Nelson Smith argues that it’s the big decisions – housing, cars, careers – that impact our finances the most.
This report focuses on finding solutions for food waste in Canada.
Why are we still using cash? The Freakonomics Radio podcast explores why the U.S. is printing more cash while other countries are doing away with it.
The mutual fund industry is blowing all kinds of smoke over proposed banning of trailer fees. Douglas Cumming, who co-authored a study that showed how trailer fees influence fund flows, shares the facts on why fees harm investors:
“At the risk of making an analogy to the cigarette industry and early denial of the harm caused by cigarettes, I hope we stop blowing smoke and make use of the information and data provided by the mutual fund industry that clearly show trailer fees harm Canadian investors.”
Thinking, fast and slow. Daniel Kahneman on brain tricks for better investing.
Michael James finally sold off the last of his individual stocks (shares in Berkshire-Hathaway) and can now say he’s a full-fledged indexer.
Researchers say we need to ‘retrain’ for retirement in order to be ready for life after work. Here are few other ways in which those in their 50s might look to prepare.
Finally, quitting Canada? Here’s how to retire in spring-like paradise in the autumn of your life.
Happy Thanksgiving, and have a great weekend!
Whether you’re a novice investor or experienced trader, most of us can stand to gain more knowledge about the stock market and different investing strategies.
Investor education is exactly what Scotia iTRADE had in mind when it launched a series of free direct investing courses online.
Through the Scotia iTRADE U education platform, investors can access free hour-long webinars on strategies such as income investing using ETFs (presented by Horizon ETFs) and using options as an income strategy (presented by Montreal Exchange).
You’ll also find education videos like this one explaining the difference between market orders and limit orders:
Investor Boot Camp
Scotia iTrade U has a boot camp aimed at sharpening the skills of self-directed investors. I had the opportunity this week to sit through the first two-hour boot camp on stock selection led by Pro Market Advisors, a consulting firm with experience in market disciplines such as technical analysis, fundamental analysis, retirement plan strategies, option strategies, and risk management.
The webinar started out by asking the participants how they go about their stock selection process. What became clear was that most novice investors gravitate towards stocks they know and recognize – big names such as Apple, Walmart, and McDonalds. That’s likely why the most widely held stocks on the S&P 500 rarely change from year-to-year. Investors buy what they know.
This type of thinking can also be location dependent. For example, the Pro Market Advisors said when they present in Seattle the participants are more likely to have Starbucks, Amazon, Costco, and Microsoft in their portfolios – all companies headquartered in Seattle and area. Meanwhile, investors who live in Calgary or Houston are more likely to have oil & gas stocks in their portfolios, while Silicon Valley residents flock toward Facebook, Google, and Apple. You get the idea.
Buying what you know is not necessarily a bad thing, the experts said, but it can be especially dangerous when you try to equate expertise in your particular field to expertise in the stock itself.
Defining objectives
Stock selection starts with defining your objectives and while it’s easy to generalize and say we all want to make money, there is some universal portfolio objectives:
1. Profit vs. Loss
2. Efficient use of time vs. waste of time
3. Systematic approach vs. “emotional gut feel” approach
4. Consistent repeatable returns vs. inconsistent randomized returns
Digging deeper the Pro Market advisors asked participants to share their portfolio goals (multiple answers were given):
• 83 percent said income generation
• 55 percent said growth via price appreciation
• 44 percent said do more with their money even if there are risks
• 32 percent said conservation of capital
• 16 percent said entertainment, mental exercise, and financial challenge
Stock screening
Next we learned about stock screening and how to narrow down your selection from the 10,000+ stocks listed on North American exchanges to a more useful grouping of 30-150 stocks that meet your criteria.
We looked at basic screening criteria such as price range, market capitalization, sector or industry, market index, relative performance vs. benchmark or index, and country of origin.
Then we looked at fundamental screening criteria. This includes familiar metrics like P/E ratio, earnings growth, dividend yield, dividend growth rate, debt ratio, and sales growth.
Once you’ve identified your screening criteria you can filter your stock selection down to a manageable list of companies to research further and decide whether to invest.
Entry point
The course then took a technical turn (no pun intended) and explained various stock entry points based on technical and fundamental analysis. The Pro Market advisors looked at stock price movements in bull, bear, and range-bound markets and offered suggestions on when to enter and exit a trade.
This information might have been too complicated for the novice investor but it was interesting nonetheless and certainly useful advice for more active traders.
Wrapping up
I enjoyed the stock selection webinar and found the information to be useful and informative. We’re not born knowing how to invest and so it’s important to educate ourselves along the way to becoming successful investors.
This boot camp was in webinar format but rather than just looking at slides the presenters keep it interactive by engaging participants through surveys and quizzes throughout the session. There’s even a follow-up session later in the week to test your knowledge and answer any questions from the participants.
Check out the ongoing education resources, including more videos and webinars, among other education events, at Scotia iTRADE U to become a more confident DIY investor.
This post has been brought to you in partnership with Scotia iTRADE. All thoughts and opinions are my own and do not necessarily reflect the views of Scotia iTRADE.
Mark Seed recently wrote in his blog, My Own Advisor, that his thoughts on his dividend investing style haven’t changed. This was actually a rebuttal of the post by our own Robb Engen, aka Echo, who described why he switched to an all ETF portfolio a short while ago.
It’s apparent that readers of both blogs are still vigorously defending their own investing style – whether they are investing for dividends or in index funds – and tend dismiss anyone who has a different strategy from their own.
However, most interesting to me was that the majority of commenters – regardless of their strategy – have only been investing for a few years, since 2008/2009, and consider themselves excellent investors enjoying double-digit returns.
When you take into account that at the end of 2008 the S&P/TSX closed at 8,988 and as of this writing it’s a little over 14,600, you would have had to have made some really bad decisions to not have turned a profit during this time.
Becoming a dividend investor
In 1990, as a bank employee with a brand new license to sell mutual funds, I sold them to myself. Only a few years later I decided that investing in dividend stocks would be more likely to help me reach my retirement goals since I had no pension plan.
With a few mistakes along the way (but, surprisingly not that many), I settled into my current portfolio which comprises of dividend paying shares from good quality companies that I feel will continue to be profitable well into the future.
My dividend payments started with post-dated cheques of about 18 cents (which I usually set aside and forgot about). I currently receive an average of about $1,000 per month in dividends on portfolio assets in the mid-six figures.
I think I have done fairly well considering:
- I have never earned more than $42,000 a year.
- I have been the sole, or at least the main, source of our family income for more than half of my married life.
- I stopped contributing to my RRSP in 2005 due to my low income.
- I simultaneously saved for my children’s education.
The last several years I have been managing my accounts and reinvesting my dividends. In the near future the dividends will become part of my regular income stream and I don’t see myself cashing out the capital, at least for quite some time.
Staying the course
There have been several studies done on behavioural economic theory which show how psychological factors tend to make people behave emotionally and irrationally.
What will happen when the next market crash occurs? Yes, the best investing style is the one that works for you, but the true test is when the rubber hits the road, as they used to say. Looking into my crystal ball, I’m predicting another crash early in the new year.
I have experienced four or five major market dips/crashes and I agree with Mark that dividend investors are more likely to continue with their strategy than someone who abruptly sees their portfolio drop by 20% or 30% or even more. A loss like that is a bit easier to take when you’re getting a regular income stream, whether you reinvest the dividends or take the cash payments.
Final thoughts
I’ve read all the arguments, together with references and white papers, proving why one investment style works better than any other.
Who I really would like to hear from are investors who have been investing for, say, at least ten or fifteen or more years.
What investment strategy do you use?
How has that worked for you in the long run?