TSX TrendWatch Weekly

I’ve found that many investors, even quite active ones, will trade equities in their margin account(s), yet leave their RRSP money in mutual funds that underperform the market averages and come with excessive management fees. Is that the way to maximize your retirement funds?  Of course not!  More below, but first last week’s results.

WEEKLY REVIEW… The S&P/TSX Composite Index declined -0.7% last week… not a major problem.  The S&P/TSX Venture Index  was flat and the major US indexes had minor declines of -0.3% to -0.7%.

Nine of the 10 S&P/TSX sector indexes are still trending higher, with ENERGY being the laggard. INFORMATION TECHNOLOGY is still looking especially strong, although there are only five companies representing that industry.

We had a bit of a setback in the proportion of S&P/TSX Composite Index stocks with positive trend values last week… down to 65% from 76% a week earlier.  Still not a major concern.  The median trend value is still positive at 0.4% per week.  As usual many equities will be performing much better than this average. You’ll find them in the Data & Charts Workbook.

SELF-DIRECTING ALL YOUR ACCOUNTS… Most of us probably have too many bank and brokerage accounts for a variety of reasons…

• Purpose-related… e.g. a chequing account to write cheques, a savings account since they used to accrue interest, a margin account to trade stocks, etc. In some cases we might have even more specific accounts… e.g. a savings account for holiday travel, an account to cover the mortgage payments, separate Canadian and US accounts to avoid currency conversion fees, etc.
• Tax-related… RRSP contributions are tax-deductible until such time as the funds are removed; and a TFSA is totally tax-free. RRSPs need to be converted to a RRIF at the end of the year that you  turn 69 (to avoid taxation on the full amount), or can be voluntarily converted at age 55. Pension funds, when you leave a company, can be placed in a locked-in RRSP and can eventually end up in a locked-in RIF (LRIF). An RESP for your children’s education will ultimately be taxed when your kid’s spend the money on university expenses, but at a (typically) low rate if they don’t have much income.

I may have left some out, but where I’m going with this topic is that all too many of us are leaving accounts passive… i.e. they could be growing much faster in value, if we took the time to optimize them.

Here are some tips…

I’ve found that many investors who trade stocks on a regular basis in their margin accounts will put their RRSP contributions in the hands of a bank branch representative to invest in mutual funds. Some will even have multiple RRSP accounts using several banks. Why?  If you’ve found that you’ve been relatively successful trading stocks in your margin account, why not trade stocks in your RRSP or  SDRIF or TFSA? Why pay the horrendous management fees associated with mutual funds at several banks or financial institutions when you could put all your RRSP contributions in one self-directed RRSP, and call the shots yourself.  We all know that 85% of mutual funds under-perform the market averages and then you are gouged with fees on top of that.

The banks will also nudge you into a passive approach for your TFSA. For those unfamiliar with tax free savings accounts, they were introduced at the beginning of 2009. Every Canadian over the age of 18 can contribute $5000 every year. It’s tax free going in and tax free going out, so it’s almost insane not to have one!  If you can’t contribute the full amount one year, you can carry your contribution room forward. And, most importantly, your gains within the TFSA are also tax free!

The banks will probably recommend that you keep your TFSA contributions in cash earning 0% interest or perhaps a GIC or mutual fund.  Why not trade stocks in that account?  Again, if you’re good at it, you’ll easily  see that money grow tax-free for years to come.

The RESP situation is a bit murkier, since for some reason the discount brokerage firms haven’t introduced self-directed RESP stock trading accounts. (Please correct me, if you know of any exceptions.) However, you should be able to find a mutual fund family that will set up an RESP for you, that will let you switch funds within that family at zero or minimal costs.  When RESPs were relatively new, that was the approach I took.  Using the same relative trend analysis™ (RTA) approach used here, when the funds that I invested in started underperforming, I switched to the one(s) with the best trend values.  I gritted my teeth paying the mutual fund management fees, but over the long term, I  outperformed any passive approach by a wide margin, and put two children through university with a very small initial investment.

The bottom line is that you’re doing yourself a disservice by not self-directing as many of your accounts as possible, and consolidating accounts  to reduce fees.

Do you really need a chequing account? Use online direct payments wherever you can. If you must use paper cheques, most discount brokers will let you write cheques on your margin account up to your margin limit. Why keep a separate chequing account with a bank? The same goes for savings accounts. Why not put that money in your trading account and save additional bank fees? You’re not earning any interest on your money in the bank anyway.

By now, many of you are probably saying “Whoa… that sounds far too risky!” The reason for that is that we’ve developed investment habits over the years that are hard to break.

But we don’t live in the 20th century anymore. Moving money around takes no more effort than a few keystrokes. So why not take control?

As for the risk level in following this self-directed approach, that’s entirely up to you.  Whether it’s an RRSP, an RRIF, a TFSA or an RESP, you decide whether you prefer to invest in the comfort of government or corporate bonds for income, or diversify through ETFs, or trade stocks or options on a regular basis. Passive accounts are like a leaking gas tank. Unless you keep filling it, you’ll run out of fuel a lot faster than others will, and pay more to boot.

Finally, if you have a locked-in plan of any kind, look into your options for unlocking some portion of your capital. It’s your money after all and the government is getting more lenient about letting you take some out. If you’re conservative, shift that money to an unlocked RRSP and invest it as you see fit there. If you need the cash, take it and spend it.

Financial institutions are all about skimming as much as they can from your hard-earned income. That’s not the way you accumulate money for retirement. Take control!

I guess I should put a caveat on this.  If you don’t have the time or interest in managing your own money, this approach is not for you. You have to have time to monitor what’s going on and buy, sell and shift cash around as required. If you do have the time, though, you should be rewarded with both better capital gains and lower fees.

This entry was posted on Tuesday, March 2nd, 2010 at 2:06 pm and is filed under Uncategorized.