Self Directed Investing | Financial Crooks

I mentioned earlier that I’ll be suggesting my young teen relative open a TFSA as soon as he is 18. I’d suggest he save his first $5500 in cash in a cashable GIC or a high interest savings account as an emergency fund. Once he has more than $5500 in savings, though, I’d suggest he keep his cash outside his TFSA and use the room to shelter income earned from higher yielding investments. He would likely do best if he invested his “equity” high-risk long-term savings in mutual funds or ETFs that mirror the major stock indices (the TSX for Canada; the NYSE for the US; various others for the world). That’s why I suggested he consider investing in Tangerine Balanced funds. Some people, however, don’t like buying index funds. They may prefer another investing approach and buy individual stocks in their TFSA instead.

When Is It Worthwhile to Open a Self-Directed TFSA at a Brokerage?

You can’t buy stocks within a TFSA without having a brokerage account.

If you don’t want the shares in a “registered” account, you can just buy them without a brokerage. For example, you can buy shares in Suncor from someone who owns some and then buy more after registering those shares with the correct Transfer Agent, Computershare. You’ll get your dividends direct deposited into your bank account or by cheque. But Computershare does not manage “registered” accounts like TFSAs and RRSPs. So you can’t use this approach for a TFSA. Or at least I couldn’t find any way to do it.

All of the big Canadian banks offer a discount brokerage that will let you open a self-directed TFSA account. There are also several independent discount brokerages. Fees change all the time but many of these brokerages will charge a fee if you don’t have at least $10 000 in assets in your TFSA. So check the details carefully before opening a TFSA brokerage account. What minimum balance is required to avoid annual, quarterly, or inactivity fees? What will it cost to purchase (or sell) shares?

Are There Any Benefits for a Teen to Opening a TFSA at Their Parent’s Brokerage?

Some discount brokerages waive the minimum balance requirement for accounts held by family members living at the same address. Check the details of your own brokerage if your teen is ready to open a self-directed TFSA.

How Would I Suggest a Teen Use a Self-Directed Brokerage TFSA to Buy Shares of Stocks?

As I said earlier, I would recommend a teen get a stock-market-mirroring ETF or mutual fund before recommending individual stocks.

If individual stocks are what they want, however, that’s their choice.

I think they should only be investing their long-term savings in equities of any kind. I also believe that those savings should be only 10-25% of their total savings until they have about $50 000 in cash and fixed income.

Those things said, they may only have $5000 to invest in stocks in their TFSA.

Should they use all $5 000 to buy shares in one company, or buy $1 000 of each of 5 companies?

I’d say that if you have invested in only 1 or 5 companies you are not diversified. You might as well take all of the risk and bet all of your money on one horse. So I’d invest the $5 000 in one company. Then, when I have saved up another $5 000, I’d buy shares in my next choice.

What Stocks Would be Good for a Beginning Investor?

Any stock can down now. Most stocks will go way down just when you least expect it. There is no stock that is best for a beginning or experienced investor.

Generally, though, if you are going to pick individual stocks, which is very risky and has been more or less proven to earn you a lower return over the long run, you probably should start with the kind that pays a reasonable dividend so that you have some income during the years when the stock is down in value and you don’t want to sell it because you would guarantee you lose money by doing that.

So look at the current situation of some of the big names and talk to financial experts to understand how to evaluate the performance and expected performance of those stocks.

Common choices include

BCE
Any of the big 5 Canadian banks, such as BMO, BNS, CM, RY, TD
FTS, ENB, TRP
CNR

Any of these stocks could crash at any time. There are times when it is better to buy each of these types of stocks depending on their current price and their expected performance.

Should I Pick Exciting Growth Stocks for My TFSA?

You can pick anything you want. If you see an electric car startup that you’re sure will triple in value in a year, yes, you can buy its stock if it’s listed on the TSX.

But ask yourself why you are willing to take this risk. Would you pull out all of your savings and use them to gamble at a casino? If not, why would you gamble this way?

If your stock drops in value or the company goes bankrupt you can NOT claim a capital loss in your TFSA. Nor do you ever get back your contribution room. You’ve wasted your TFSA contribution space and you’ve lost money that cannot be used to offset gains from other more successful investments. A lose-lose scenario. Not what I’d choose.

Good Luck Picking Individual Stocks for Your TFSA

Overall, picking individual stocks for your TFSA is a tiring, somewhat worrying approach. If you don’t really like managing money or handling investments, why not just stick to the Canadian Couch Potato approach and buy ETFs or mutual funds? It will likely make you more money and take less thought and worry.

Either way, I’d encourage people saving for the long-term to use their TFSA to buy and hold equity investments.

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Do you use your TFSA only for cash and fixed income investments or do you have equities in it? Please share your strategy with a comment.

As I mentioned in another article, I don’t believe I can guess which way the equity markets are moving. So I rely on keeping a fairly fixed percentage in equities and in fixed income investments. That forces me to “buy low” whenever the markets drop and to “sell high” whenever they are surging upwards. Being very, very conservative, though, I keep about 50% of my portfolio in fixed income investments although where I keep it varies from year to year.

Are GICs are Great Investment? Where Did I Keep My Fixed Income in the 1980s?

I’ve heard many people dismiss the value of having a GIC in the 1980s when interest rates got frighteningly high because they said that inflation was also ridiculously high. I’m not so sure. All I know for sure is that the RRSP money I put in GICs in those years earned 9-15%. I’m not at all convinced that my *personal* rate of inflation in those years was 7-13%. In fact, my rent, which was my greatest cost, dropped twice due to oil patch layoffs and a need to keep paying tenants happy.

Nowadays, of course, it’s difficult to get a GIC paying even 3%. That doesn’t mean I’ve abandoned them though. I keep some of our emergency fund in a rotating series of 1-year GICs—each month 1/12 of the emergency fund GICs mature. If we still have jobs, I re-invest the money for another 12 months. I’m doing that because (a) it keeps the money out of sight so it doesn’t get accidentally spent (b) it helps if interest rates fall instead of rise in that 12 month period and (c) it ensures we would have enough money each month for a year to pay our essential costs.

I also keep some of our fixed income money in our retirement accounts in GICs. I used to keep quite a bit, but now that we have a non-registered investment account balance growing as well (because our TFSAs and RRSPs are maxed out) I’m keeping some of our fixed income dollars in the non-registered part of our portfolio, so that I can try to save the most tax. It’s tricky to decide where to keep which assets!

What About Bonds and Bond Funds? Am I Investing Any of My Fixed Income In Bonds?

For well over 5 years, everyone has told us to get out of our PH&N Bond Fund. I’m glad that so far we haven’t. Although there was one year (2015) when we lost 1.2% rather than gained anything on it, we’ve made a good return all of the other years, including 2016. Instead of selling our entire position, I just keep selling off a chunk each year to remove the growth of the fund and re-invest it elsewhere. For example, if I had 100,000 in the fund on January 1, and on March 17 it was worth 107,000, I would sell enough units to get $7 000 cash, which I invest elsewhere. I’ve done this “gains harvesting” 8 times in the last 5 years. I’m also have not invested any new money in this fund since 2010.

Other analysts recommend that if you are going to invest in a Bond fund, you should pick one that buys and holds bonds to maturity, not one that plays with Bonds, buying and selling them to try to make capital gains. If you buy units in a fund that holds the bonds to maturity, and if the term to maturity is short (say 1-3 years) you don’t have to worry about a huge decrease in the value of your investment. You might have to accept, though, a quite low return on your investment.

Historically, many people bought actual individual bonds or their coupons as investments. What commission you are paying on the purchase, though, is not transparent, and most financial institutions aren’t offering great prices for small buyers. If the value of an individual bond suits your needs, by all means buy it, but for me, it’s not worth the time to find a good deal.

Real Estate Investment Trusts, REITS, are NOT Fixed Income

I recently read someone say that they had invested their Fixed Income dollars into REITs. Sorry but that is NOT a fixed income investment. REITs can provide a good source of income but they are a type of equity. If their business struggles, the share price of the REIT can fall dramatically. They are also risky if interest rates start to climb, according to some analysts, because the often depend on borrowing money directly or on their tenants borrowing money.

I own some units of REITs but I count them in my Equity column, not my Fixed Income column.

Only Some Preferred Shares Offer Fixed Income

I only tried investing in Preferred Shares once. When the share price started to drop a bit, I got very nervous. I realized with the type of preferred I had purchased, I could lose money: if interest rates rose, the dividend would not seem high enough to justify the capital cost per share so someone would only buy my shares if I sold them at a lower price per share. I waited till the shares re-bounded to generate a small profit and sold them.

From what I’ve read so far, some preferred shares should be considered Equity and a very few could be considered Fixed Income. I don’t claim to understand them well enough to make a recommendation for or against investing Fixed Income in Preferreds. I have chosen not to, for now.

High Interest Savings Accounts Can Provide a Reasonable Fixed Income Return

Surprisingly, I’ve made a decent rate of return on my fixed income investments held in High Interest Savings Accounts, HISAs. In particular, I have been able to keep some of our non-registered money bouncing around between Tangerine, PC Financial, EQ Bank, Oaken Financial and others to ensure it earns at least 1.7% and often up to 3.1%.
Unfortunately, that interest is taxable. Still it helps keep the money at close to not losing ground against inflation. And it’s very easy to move the money—it just takes a few clicks of a mouse.

HISAs inside our brokerage accounts at BMO InvestorLine, CIBC Investor’s Edge, and RBC Direct Investing pay much less. Currently, they are paying about 0.5%. It’s still better than leaving it as “cash” in your account and earning nothing, but it’s not keeping up with inflation.

No Easy Answers for Fixed Income Investing

Between GICs, HISAs and the Bond fund, I’m averaging about 3-4% a year return before tax on my fixed income investments. (That’s why I’m staying in the Bond Fund.) It’s not much but it is probably almost keeping up with inflation.

It does mean that my true growth in the year has to come from the 50% of my investments in the equity markets. That is quite a responsibility for some stocks and index funds to provide. It’s been fine for the past few years because the capital value of our equities has been growing and many of them pay growing dividends. If we move into a “bear” or declining market, though, without interest rates improving, things could get painful quickly.
I don’t’ see any way that I am going to be able to control the market direction or interest rates, though, so I’ll continue with my asset allocation plan, re-balance regularly, and hope for the best!

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Category Archives: Self Directed Investing

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